The XYZ Corporation is planning topurchase an extruder. The purchase price of th

Question

The XYZ Corporation is planning topurchase an extruder. The purchase price of the extruder is$350,000. The company plans to make a down payment of 25% of thefirst cost of the extruder and to make a 7-year, 10%, yearlypayment loan for the rest of the first cost of theextruder.   XYZ believes that the extruder can be soldfor $75,000 at the end of its 15-year service life.

The new extruder will increase thecompany's annual income by $90,000. Maintenance and operating costsare expected to be $4,000 during the first year and to increase by$1,200 each year. XYZ uses a before-tax MARR of 12% for itspreliminary economic studies.

What is the net present worth (NPW)of this investment to XYZ?

Explanation / Answer

1 2 3 4 5 6=2-3-4-5 7 8=6*7 Year Income Payment Interest Other cost Cash inflows PAF at 12% Present value 0 0 87500 0 0 -87500 1 -87500 1 90000 37500 26250 4000 22250 0.8929 19867.025 2 90000 37500 22500 5200 24800 0.7972 19770.56 3 90000 37500 18750 6400 27350 0.7118 19467.73 4 90000 37500 15000 7600 29900 0.6355 19001.45 5 90000 37500 11250 8800 32450 0.5674 18412.13 6 90000 37500 7500 10000 35000 0.5066 17731 7 90000 37500 3750 11200 37550 0.4523 16983.865 8 90000 0 0 12400 77600 0.4039 31342.64 9 90000 0 0 13600 76400 0.3606 27549.84 10 90000 0 0 14800 75200 0.322 24214.4 11 90000 0 0 16000 74000 0.2875 21275 12 90000 0 0 17200 72800 0.2567 18687.76 13 90000 0 0 18400 71600 0.2292 16410.72 14 90000 0 0 19600 70400 0.2046 14403.84 15 165000 0 0 20800 144200 0.1827 26345.34 Net worth of machine = 223963.3 (Note:-Tax rate is not given in the problem so we areconsidering only cash expenses i.e            we arenot taking depreciation) Working Notes:- Interest payments:- Cost Payment Interest Balance 350000 87500 0 262500 262500 37500 26250 225000 225000 37500 22500 187500 187500 37500 18750 150000 150000 37500 15000 112500 112500 37500 11250 75000 75000 37500 7500 37500 37500 37500 3750 0 income of 15th year = 90000+75000                             = 165000 1 2 3 4 5 6=2-3-4-5 7 8=6*7 Year Income Payment Interest Other cost Cash inflows PAF at 12% Present value 0 0 87500 0 0 -87500 1 -87500 1 90000 37500 26250 4000 22250 0.8929 19867.025 2 90000 37500 22500 5200 24800 0.7972 19770.56 3 90000 37500 18750 6400 27350 0.7118 19467.73 4 90000 37500 15000 7600 29900 0.6355 19001.45 5 90000 37500 11250 8800 32450 0.5674 18412.13 6 90000 37500 7500 10000 35000 0.5066 17731 7 90000 37500 3750 11200 37550 0.4523 16983.865 8 90000 0 0 12400 77600 0.4039 31342.64 9 90000 0 0 13600 76400 0.3606 27549.84 10 90000 0 0 14800 75200 0.322 24214.4 11 90000 0 0 16000 74000 0.2875 21275 12 90000 0 0 17200 72800 0.2567 18687.76 13 90000 0 0 18400 71600 0.2292 16410.72 14 90000 0 0 19600 70400 0.2046 14403.84 15 165000 0 0 20800 144200 0.1827 26345.34 Net worth of machine = 223963.3 (Note:-Tax rate is not given in the problem so we areconsidering only cash expenses i.e            we arenot taking depreciation) Working Notes:- Interest payments:- Cost Payment Interest Balance 350000 87500 0 262500 262500 37500 26250 225000 225000 37500 22500 187500 187500 37500 18750 150000 150000 37500 15000 112500 112500 37500 11250 75000 75000 37500 7500 37500 37500 37500 3750 0 income of 15th year = 90000+75000                             = 165000

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