A proposed investment consists of constructing a building, purchasing production

Question

A proposed investment consists of constructing a building, purchasing production machinery, and operating for 20 years; its first cost is $250,000 with a salvage value $50,000. Since the maximum life of the machinery is 12 years, it will be necessary to renew the machinery once during the 20 years. The first cost of the machinery is $132,000 and its salvage value is $132,000/(age, years). The annual income is less the operating expense is expected to be $50,000. Annual interest is 6 percent compounded annually.
a. When is the most favorable time to replace the machinery?
b. Compute the present worth of the profit if the machinery is replaced at the time indicated by part (a)

Please show your work I really no clue how to do

Explanation / Answer

a) The most favorable time to replace the machinery would be every year.

This equation below will demostrate it.

Cost = (132,000 * 12/x) - 132,000/x

If you plug 1 in for x which is the number of times you change the machinery during the twelve years you get

1--$1,452,000 Cost

For 12 times you get

12---$121,000

b) So if we take the number from (a) that is every year or x=12, our total profit would be

Total Profit = earnings - $121,000

And the profit is

($50,000 * 20 years)* 0.94

940,000 - $121,000 - $250,000

Total Profit = $569,000

Your question wasn't to clear if the salvage value of
$50,000 from the first sentence will be added so you can add that to the final answer if you are still not getting the right result however with the information given it should be correct.

Hope this helped, good luck with your work!

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