Considering a machine which will have an estimated service life of 10 years with

Question

Considering a machine which will have an estimated service life of 10 years with a salvage value of 10% of the investment cost. Its expected saving from annual operating and maintenance costs are estimated to be $60,000.To expect a 15% rate of return on investment. What would be the maximum amount that you are willing to pay for the machine? (10 points) Hint : To make the decision about buying this machine. The PW of its cash-flow should be at least 0. So find PW with unknown purchasing price. Then put PW equal to 0 and solve the problem.

Explanation / Answer

The Maxumum amount to be paid for the machine should be the value at which present value of cash flows are equal to 0

Let the investment be x. Therefore the salvage value will be 0.1x. Using annuity factor at rate of 15% for 10 yrs, we derive the following equation,

-x+(60000*5.01877)+.1x(.2472) = 0

Therefore , x = (60000*5.01877)+.1x(.2472) = 301126.2+.02472x

Therefore, x-.02472x = 301126.2

Therefore, x = 301126.2 / .9753

x = 308758

Residual value = 30875.8

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