The XYZ Corporation is planning to purchase an extruder. The purchase price of t

Question

The XYZ Corporation is planning to purchase an extruder. The purchase price of the extruder is $350,000. The company plans to make a down payment of 25% of the first cost of the extruder and to make annual payments on a 7-year. 10% loan for the remainder of the cost of the extruder. XYZ believes that the extruder can be sold for $75,000 at the end of its 15-year service life. The new extruder will increase the company's annual income by $90,000. Maintenance and operating costs are 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 its preliminary economic studies. What is the net present worth (NPW) of this investment to XY

Explanation / Answer

Downpayment = 25/100 * 350000 = $87,500

Amount of loan = 75/100 * 350000 = $262,500

Annual installment of the loan for 7 years at 10% loan = PMT(10%,7,-262500) = $53,918.94

Thus, the net present worth of the investment is $225,159.44

Year Machinery costs Income M&O costs Salvage Total Cashflow Present Value factor = 1/1.12^year Present Value of cashflow 0 -87500 -87500 1 -87500 1 -53918.94 90000 -4000 32081.06 0.892857 28643.8 2 -53918.94 90000 -5200 30881.06 0.797194 24618.19 3 -53918.94 90000 -6400 29681.06 0.71178 21126.39 4 -53918.94 90000 -7600 28481.06 0.635518 18100.23 5 -53918.94 90000 -8800 27281.06 0.567427 15480.01 6 -53918.94 90000 -10000 26081.06 0.506631 13213.48 7 -53918.94 90000 -11200 24881.06 0.452349 11254.93 8 90000 -12400 77600 0.403883 31341.34 9 90000 -13600 76400 0.36061 27550.61 10 90000 -14800 75200 0.321973 24212.39 11 90000 -16000 74000 0.287476 21273.23 12 90000 -17200 72800 0.256675 18685.95 13 90000 -18400 71600 0.229174 16408.87 14 90000 -19600 70400 0.20462 14405.23 15 90000 -20800 75000 144200 0.182696 26344.8 NPW $225,159.44

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