Can someone help me solve this? 2b3 You own a small fabrication shop that has sp

Question

Can someone help me solve this?

2b3 You own a small fabrication shop that has specialized in custom work for construction projects. ou are contemplating purchasing a CNC water jet cutter machine. This machine uses an ultra high pressure water stream with suspended fine grit to cold cut materials. It is especially useful in alloy work and to cut intricate patterns of architectural materials such as marble, since in each of these applications, the heat generated by other cutting techniques is harmful (it changes the of the alloy and discolors the architectural materials). properties You have the following estimates for the machine: Installed cost $112,000 $31/h (includes maintenance and power) Operating cost Saleable Machine Hours Year l Year 2 Year 3+ Useful life of the machine 800 1,200 1,450 15 years At the time you are contemplating this decision, the going interest rate for long-term debt to your company that would be secured by assets is 8.5%. You have not decided yet whether to borrow extra funds for the purchase. How would you price the machine, i.e, what charge-out rate per hour would you propose for the machine? Specify and justify an appropriate discount rate (one to two sentences). Since hours are increasing over the first two years, would it make sense to have an initial higher price followed by a lower price? Ignore inflation in your analysis, ie., do the analysis in present dollars, and assume that minor inflationary costs (increase in operating costs) can be passed on to customers. Also, ignore tax ile, the discount rate you specify is a pre-tax return). Note that this problem does not require the calculation of any interest payment owing to others, i.e., you would use the same approach to this problem regardless of whether you financed the purchase by equity (your own money), debt (other peoples money), or a combination of the two. The interest rate quoted above is included simply to help you set an appropriate time value of money

Explanation / Answer

Let X be the pricing or charge out per hour, buying this machine requires a loan that cost 8.5% , that means required rate of return is min 8.5% and that we will consider as discount rate.

So, in 15 years, lets say that the Net cash flows produced from the machine after selling its hour should be equal to its buying cost

i.e. -112000=-((X-31)*800/(1.085) + (X-31)*1200/1.085)^2 + (X-31)*1450/1.085)^3+...............(X-31)*1450/1.085)^15

On calculating the X from the above equation we will get X-31 = 9.97 or X = $41/hr

So, we can say that minimum charge out rate should be $41/hr to pay the loan and able to get the cost out of the selling of machine Hrs.

As cost is increased in 2nd and 3rd year only and there is no any other cost involved in next 15 years, it would advisable to keep the cost same and not higher in initial years, it will give your competitor an extra advantage to sell the machine hr at lower rates and your sales would not go up as required.

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