Homework Answers
Ans.
Year Cash Flows
0 -120000
1 0
2 0
3 0
4 0
5 - 5000
6 - 5500
7 - 6000
8 - 6500
9 - 7000
10. - 7500 + 10000(Salvage) = 2500
Net present value at 10% interest rate,
NPV = -120000 + 0 + 0 + 0 + 0 - 5000/(1+0.1)5- 5500/(1+0.1)6- 6000/(1+0.1)7- 6500/(1+0.1)8- 7000/(1+0.1)9+ 2500/(1+0.1)10
NPV = -$134325.29
Annual equivalent cost of the machine = A
A = NPV* [ 0.10(1+0.10)10/((1+0.10)10 - 1) ]
A = -134325.29*0.1627454
A = - 21860.8224
Thus, annual equivalent cost of the new machine is $21860.8224
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