Question

A company invested $150,000 in a new machine expecting the following schedule returns on their investment. $12,000 at the end of year 3 and increasing by $2000 starting year 4 through year 10.Starting year 11through 20,the returns drop to $8000 per year. Maintenance costs are estimated at $1000 per year for the first 10 years, and $1500.00 per year for years 11 through 20. The salvage value of the machine is $7500. a) Draw a cash flow for this project. b) If the interest rate per year is 6%, what is the present worth of this investment? Is it a good investment? c) if the return on investment start at $6,000 at the end of yearl and increases by 3% per year for the duration of the project, all maintenance costs remain the same as in part b);would this alternative be feasible? d) which alternative b) or c) is better? e) If the interest rate per year is 6%, compounded continuously, formulate (DO NOT SOLVE) the annual worth (AWI) for part d)

Answer 1

answer

A) TOTAL COST OF INVESTMENT IS THE 150000 $

RETURNS WILL AMOUNT TO FOR FIRST 3 YEARS :- 36000$

THEN 96000 , AFTER THAT 88000$

TOTAL RETURNS WILL BE 234000$

BUT , MAINTENANCE COST WILL ALSO AMOUNT TO IT WHICH WILL BE EQUAL TO 26500$ , ADDED BY THE SALVAGE VALE 7500$

B) 6% INTEREST WILL AMOUNT TO THE COST ALMOST 9000$ PER YEAR , FOR 20 YEARS IT WILL BE 180000$. IT IS NOT FEASIBLE AFTER TAKING RETURNS INTO THE EFFECT. THE INVESTMENT IS ALMOST 330000$. THE LOSS AMOUNT WILL BE VERY HIGH AND WHICH MAKES IT VERY DOUBTFUL TO OPERATE.

C)

NO STILL IT WILL NOT BE FEASIBLE AS THE RETURN DOES NOT OVERCOME THE INVESTMENT COST IS VERY HIGH. THIS WILL NOT FEASIBLE AT ALL.

D ALTERNATIVE B IS BETTER DUE TO THE LESS LOSSES COMPARED TO THE ALTERNATIVE D . WHICH HAVE VERY LESS RETURNS.