Star Inc. must purchase a small size milling machine. The following is known abo
ID: 1222366 • Letter: S
Question
Star Inc. must purchase a small size milling machine. The following is known about the machine and about possible cash flows. The machine is expected to have a useful life of 8 years. The company has a MARR of 7%. Determine the NPW of the machine.
p=.25
p=.50
p=.25
First cost
$40,000
$40,000
$40,000
Annual savings
2,000
5,000
8,000
Annual costs
12,000
8,000
6,000
Actual salvage value
4,000
5,000
6,500
p=.25
p=.50
p=.25
First cost
$40,000
$40,000
$40,000
Annual savings
2,000
5,000
8,000
Annual costs
12,000
8,000
6,000
Actual salvage value
4,000
5,000
6,500
Explanation / Answer
E(Saving/Costs) = (2000 - 12,000)*(.25) + (5000 - 8000)*(.50) + (8000 - 6000)*(.25)
= -3500
E(Salvage Value) = 4,000*(.25) + 5,000*(.50) + 6,500*(.25)
= 5125
NPW=-40,000 -3500(P/A, 7%,8) +5125(P/F, 7%,8)
=-40000-3500*(5.971)+5125*(5.971)
=-30297.125
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