Question 1 A company buys a machine for $100,000 • Maintenance is expected to be $10,000 per year Revenue from this opportunity will be $25,000 per year The life of the machine is expected to be 10 years At the end of 10 years, the machine should be worth no more than $20,000 The company's MARR is 10% Create the cash flow for this opportunity What is the present worth of this opportunity? What is the annual uniform cost/revenue of this opportunity? Is this opportunity worth pursuing? Make a recommendation

Ans.

a) Cashflows in,

Year 0 = - Machine Cost = -$100000

Year 1 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 2 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 3 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 5 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 6 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 7 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 8 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 9 = Revenue- Maintainance Cost = 25000 - 10000 = $15000

Year 10 = Revenue- Maintainance Cost + Salvage = 25000 - 10000 + 20000 = $35000

b) Present worth of the above cashflows at 10% interest rate,

PW = -100000 + 15000*(P/A, 10%, 9) + 35000*(P/F, 10%, 10)

=> PW = -$120.63

c) As this opportunity has a negative present worth, so, there will be an uniform annual cost (C), so,

120.63 = C*(P/A, 10%, 10)

=> C = $19.632

Thus, the uniform annual cost is $19.632 (represent cost by negative sign)

d) As the net present worth of the given opportunity is negative i.e. the usage of the project will effectively cost the user than benefitting him, so, opportunity is not worth pursuing.