Aerotron Electronics is considering purchasing a water filtration system to assi

Question

Aerotron Electronics is considering purchasing a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated at $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics' MARR is 10% compounded annually. What is the present worth of this investment?

Explanation / Answer

To find the solution, we need to assume that the savings of $12000 every year is the revenue of the project. Costs and Salvage value are also mentioned. The present worth of the project is $12,533.

Cash Flows 0 1 2 3 4 5 6 7 1 Revenue $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 2 Operating and Maintenance Costs $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 3 Salvage Value $ 7,500 Total Cash Flows (1-2+3) $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 17,500 Present Value of all Cash Flows $52,532.87 Initial Investment $40,000.00 NPV $ 12,533

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