For a $500,000 investment in a machine: (a) Based on a 10-year planning horizon,

Question

For a $500,000 investment in a machine:
(a) Based on a 10-year planning horizon, a $50,000 salvage value, and a
10 percent MARR, what annual savings are required for the investment
to break even?
(b) Assume $92,500 is an accurate estimate of the annual savings that
will result from this investment, but it is not clear how long the machine
will be used. Assuming that the salvage value decrease linearly from
$500,000 to $50,000 over a 10-year in the s What is the break-even value
for the investment

Explanation / Answer

a) Let annual savings be x

present value of all savings = $500,000

500000 = x/1.1 + x/1.1^2 + x/1.1^3 ........x/1.1^10 + 50000/1.1^10

x=$78,235.43

annual savings = $78,235.43

b)let the duration be n

per year reduction in salvage value = (500000-50000)/10 = 45000

Salvage value after n years=(500000-45000*n

500000 = 92,500/1.1 + 92,500/1.1^2 + 92,500/1.1^3 ........92,500/1.1^n + (500000-45000*n)/1.1^n

n= 3 years

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