The XYZ Corporation is planning to purchase an extruder. The purchase price of t

Question

The XYZ Corporation is planning to purchase an extruder. The purchase price of the extruder is
$350,000. The company plans to make a down payment of 25% of the first cost of the extruder and to
make a 7-year, 10%, yearly payment loan for the rest of the first cost of the extruder. XYZ believes that
the extruder can be sold for $75,000 at the end of its 15-year service life.
The new extruder will increase the company's annual income by $90,000. Maintenance and operating
costs are expected to be $4,000 during the first year and to increase by $1,200 each year. XYZ uses a
MARR of 12% for its preliminary economic studies.
What is the net present worth (NPW) of this investment to XYZ?
Hint: You should use 10% to estimate the loan payments and you need to use the company MARR
as the interest rate while calculating the NPW. Companies use a minimum attractive rate of return
(MARR) to evaluate projects.

Explanation / Answer

P = $350,000. S = $75,000. M&O = $4,000. M&OG = $1,200.
Uniform Annual Benefit = $90,000
MARR = 12%.
Down Payment = 0.25 × 350,000 = $87,500.
Loan = 350,000 - 87,500 = $262,500.
Interest rate for the loan = 10%.
Loan Payments, A = 262,500 (A/P, 10%, 7) = 262,500 (0.2054) = $53,917.50.

NPW = Present Worth of Benefits - Present Worth of Costs
= {90,0000(P/A,12%,15) + 75,000(P/F,12%,15)}- {53,917.50 (P/A,12%,7) + 4,000(P/A,12%,15) + 1,200 (P/G, 12%,15) + 87,500 }
= {90,0000(6.811) + 75,000(0.1827)}- {53,917.50 (4.564)+ 4,000(6.811) + 1,200 (33.920) + 87,500}
= 626, 692.5 – 401,527.5 = $225,165.

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