Corns Squeezings, Inc. is considering the purchase of new mashing equipment. The

Question

Corns Squeezings, Inc. is considering the purchase of new mashing equipment. The CEO of the company, Dollar Signs Dallas, has requested that you provide the net present value for the equipment being considered. The relevant data for the new equipment are as follows:

First cost $ 125,000
Annual income $ 10,000
Annual operating costs $ 8,000 (first year and increasing by $750 per year)
Property taxes 5% of first cost (payable at the end of each year)
Salvage value 8% of first cost

CSI has a minimum attractive rate of return (MARR) of 4%, and the equipment has an expected useful life of 6 years.

Explanation / Answer

Cash Flow for first year = 10,000 - (0.05 x 125,000) - 8000 = -4250

Cash Flow for second year = 10,000 - (0.05 x 125,000) - 8750 = -5000

Cash Flow for third year = 10,000 - (0.05 x 125,000) - 9500 = -5750

Cash Flow for fourth year = 10,000 - (0.05 x 125,000) - 10,250 = -6500

Cash Flow for fifth year = 10,000 - (0.05 x 125,000) - 11,000 = -7250

Cash Flow for sixth year = 10,000 - (0.05 x 125,000) - 11,750 + (0.08 x 125,000) = 2000

Net Present Value = -125,000 -4250/1.04 - 5000/(1.04^2) - 5750/(1.04^3) - 6500/(1.05^4) - 7250/(1.05^5) + 2000/(1.04^6)

= - $ 148,755.62

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