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Piece of new equipment has been proposed by engineers to increase the productivity of a certain manual welding operation
Piece of new equipment has been proposed by engineers to increase the productivity of a certain manual welding operation. The investment cost is $30,000, and the equipment will have a market (salvage) value of $4,000 at the end of its expected life of five years. Increased productivity attributable to the equipment will amount to $9,000 per year after extra operating costs have been subtracted from the value of the additional production. Suppose that MARR is equal to 20% per year. What is the project's ERR, and is the project acceptable?
Expert Solution
1. Future value of cash inflows = year 1 CF * (1 + Rate)^4 + year 2 CF * (1 + Rate)^3 + year 3 CF * (1 + Rate)^2 + year 4 CF * (1 + Rate)^1 + (year 5 CF + Salvage) * (1 + Rate)^0
Future value of cash inflows = 9000 * 1.20^4 + 9000 * 1.20^3 + 9000 * 1.20^2 + 9000 * 1.20^1 + 13000 * 1
Future value of cash inflows = 70974.40
2. ERR = (Future value of cash inflows / Investment)^(1/years) - 1
ERR = (70974.40 / 30000)^(1/5) - 1
ERR = (2.3658)^(1/5) - 1
ERR = 1.1879 - 1
ERR = 18.79%
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