Suppose, live A-V Engineering Fabrication plans to invest to buy the new machine

Question

Suppose, live A-V Engineering Fabrication plans to invest to buy the new machine with an estimate of $90,000. This new will enable mote production which estimates an average ear rung of $50,000/year. Salvage value of the machine after 10 years is expected to be $10,000. However, running the new machine for extra time will incur additional operating cost of $15.000/year. Assume a fixed 15% interest rate. How many years (Find n, years ?) would it take to get the return on the new machine investment.

Explanation / Answer

Yearly earning as of the new machine = $ 50000 - overtime cost $15000 = $35000

discount interest rate (fixed) = 15%

So, present value of 3 years = $35000 * PVIFA (15%, 3) = $35000 * 2.283 = $79905

and present value of 4 years = $35000 * PVIFA (15%, 4) = $35000 * 2.855 = $99925

number of years it would take to have return of new machine = 4 - [(99925 - 90000) / (99925 - 79905)

= 4 - 0.50 = 3.50 years

So, it will take 3.50 years to have return of new machine.

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