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A CNC machine can be replaced with one of two models. The basic model with a lif

ID: 1106064 • Letter: A

Question

A CNC machine can be replaced with one of two models. The basic model with a life of e years Costs $75,000 and is expected to bring in net $22,000 annually. For the deluxe model, the data are 8 years, $120,000, and $40,000 respectively. Assuming /* 8%, calculate the discounted payback period for each project. (25 points) A CNC machine can be replaced with one of two models. The basic model with a life of 8 years costs $75.000 and is expected to bring in net s22,000 annually. For the deluxe model the data are 8 years, S120.000, and $40,000 respectively. If the MARR = 10%. which model is a better choice on the basis of the Pw criterion? (25points)

Explanation / Answer

(1st Question)

Discounted Payback Period (DPBP) is the time by when cumulative discounted Cash flow is zero.

Basic Model

Year

Cash Flow ($)

PV Factor @8%

Discounted Cash Flow ($)

Cumulative Discounted Cash Flow ($)

(A)

(B)

(A) x (B)

0

-60,000

1.0000

-60,000

-60,000

1

18,000

0.9259

16,667

-43,333

2

18,000

0.8573

15,432

-27,901

3

18,000

0.7938

14,289

-13,612

4

18,000

0.7350

13,231

-382

5

18,000

0.6806

12,250

11,869

Deluxe Model

Year

Cash Flow ($)

PV Factor @8%

Discounted Cash Flow ($)

Cumulative Discounted Cash Flow ($)

(A)

(B)

(A) x (B)

0

-1,00,000

1.0000

-1,00,000

-1,00,000

1

30,000

0.9259

27,778

-72,222

2

30,000

0.8573

25,720

-46,502

3

30,000

0.7938

23,815

-22,687

4

30,000

0.7350

22,051

-636

5

30,000

0.6806

20,417

19,781

For Basic model, DPBP lies between years 4 & 5.

DPBP = 4 + (Absolute value of cumulative discounted Cash flow, year 4 / Discounted Cash flow, year 5)

= 4 + (382 / 12,250) = 4 + 0.03 = 4.03 years

For Deluxe model, DPBP lies between years 4 & 5.

DPBP = 4 + (Absolute value of cumulative discounted Cash flow, year 4 / Discounted Cash flow, year 5)

= 4 + (636 / 20,417) = 4 + 0.03 = 4.03 years

(4)

PW of both Models is as follows.

Since Deluxe model has higher PW, this is a better choice.

Basic Model

Year

Cash Flow ($)

PV Factor @8%

Discounted Cash Flow ($)

Cumulative Discounted Cash Flow ($)

(A)

(B)

(A) x (B)

0

-60,000

1.0000

-60,000

-60,000

1

18,000

0.9259

16,667

-43,333

2

18,000

0.8573

15,432

-27,901

3

18,000

0.7938

14,289

-13,612

4

18,000

0.7350

13,231

-382

5

18,000

0.6806

12,250

11,869

Deluxe Model

Year

Cash Flow ($)

PV Factor @8%

Discounted Cash Flow ($)

Cumulative Discounted Cash Flow ($)

(A)

(B)

(A) x (B)

0

-1,00,000

1.0000

-1,00,000

-1,00,000

1

30,000

0.9259

27,778

-72,222

2

30,000

0.8573

25,720

-46,502

3

30,000

0.7938

23,815

-22,687

4

30,000

0.7350

22,051

-636

5

30,000

0.6806

20,417

19,781

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