5. ABC Block Inc. is considering replacing their wood shaving machine. The indus

Question

5. ABC Block Inc. is considering replacing their wood shaving machine. The industrial engineer for ABC has initially selected the QuickShave machine. The machine has a first cost of $35,000 and a salvage value of $6,000 at the end of its seven year useful life. The cash flows associated with the machine are presented below. Assuming ABC's MARR is 6%, determine if the machine should be purchased or not ear 1 2345 6 7 Cash flow(S) 7,000 7,000 7,000 5,500 5,500 4,500 4,500 A $10,000, 5% bond issued by Holiday Shipping is selling for $9,500. The bond pays interest annually and matures in ten years. Determine the rate of return for the bond 6. 7. A machine costing $35,000 has associated income of $8,000 the first year with yearly decreases of $1,000 for the eight year life of the machine. (The 1st year year $7,000, etc.) Using Excel determine the payback for the machine $8,000, the 2d

Explanation / Answer

5.

R = 6%

Time = 7 yeas

NPV = present value of cash inflows + present value of the salvage value – initial investment

NPV = (7000/1.06 + 7000/1.06^2 + 7000/1.06^3 + 5500/1.06^4 + 5500/1.06^5 + 4500/1.06^6 + 4500/1.06^7) + 6000/1.06^7 – 35000

NPV = $2332.94

Since the NPV of the investment is positive, so the machine should be purchased.

6.

Selling price of the bond = $9500

Annual coupon payment = 10000*5% = $500

Face value = $10000

Time = 10 years

Let, rate of return = R

Then,

9500 = 500*(1-1/(1+R)^10)/R + 10000/(1+R)^10

At R = 5%

Present value of the cash inflows = $10000

At R = 6%

Present value of the cash inflows = $9264

As per the method of interpolation,

R = 5% + ((10000-9500)/(10000 – 9264))*(6%-5%)

R = 5.67%

So, rate of return is 5.67%.

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