JK Manufacturing would like to install a machine costing $37,500 with a life of
ID: 1106008 • Letter: J
Question
JK Manufacturing would like to install a machine costing $37,500 with a life of 12 years to bring in benefits to the company of $5,100 per month. The monthly expenses for the machine are $4,650. If the MARR that the company uses is 12% per year, what should be the minimum salvage value as a percentage of the initial machine cost that the company should get at the end of the machine life to justify installing the machine?
Around 12%
Around 24%
Around 36%
Around 48%
Around 12%
Around 24%
Around 36%
Around 48%
Explanation / Answer
Ans: Around 36%
Explanation:
Here, Interest rate per month = 12% / 12 = 1%
Number of interest period = 12 year * 12 = 144
Net revenue per month = 5100 - 4650 = 450
To justify the installation of the machine, let us equate NPV = 0
NPV = -37,500 + 450(P/A, 1%, 144) + F(P/F, 1%, 144)
0 = -37500 + 450(76.1372) + F(0.2386)
0 = -37500 + 34261.74 + F(0.2386)
0 = -3238.26 + F(0.2386)
F(0.2386) = 3238.26
F = 3238.26 / 0.2386
= $13,572
Thus, minimum salvage value should be $13,572.
Thus, the minimum salvage value as a percentage of the initial machine cost = (13,572 / 37,500) * 100 = 36%
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