Purchase Solution

# resent worth, future worth, and annual worth

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a) When the salvage value is in year 4, and

b) When the salvage value is in year 5.

Machine 1 Machine 2 Machine 3
Initial Cost \$800,000 \$650,000 \$575,000
Annual Operating Cost \$50,000 \$90,000 \$105,000
Salvage value \$40,000 \$32,500 \$28,750

Hint:

A cash flow table for part a machine 1 could be stated as follows where costs are negative or where costs are positive.  Here they are shown as negative.
End of Year Costs
0 1 2 3 4
(\$800,000.00) (\$50,000.00) (\$50,000.00) (\$50,000.00) (\$10,000.00)

The clearest approach is probably finding the NPV of this.  Assuming the monetary values are in cells A3 through E3

=NPV(10%,B3:E3) + A3 = \$931,172.73

Another way to determine this is to find each present value separately keeping in min nd that the result of the PV function will be the opposite of the payment, or the future value.
Machine 1
Initial Cost (\$800,000.00) already a present value
PV(operating cost) (\$158,493.27) (\$158,493.27)
PV(Salvage Value) \$27,320.54 \$27,320.54
PW (Cost)=Sum= (\$931,172.73) Sum

Equivalently, this could have been written with signs reversed:
Machine 1
Initial Cost (\$800,000.00) already a present value
PV(operating cost) (\$158,493.27) (\$158,493.27)
PV(Salvage Value) \$27,320.54 \$27,320.54
PW (Cost)=Sum= (\$931,172.73) Sum

These could have been combined in one equation:

-931172.7341

Or equivalently:

-931172.7341

##### Solution Summary

Determinate the present worth, future worth, and annual worth for this case is provided.

##### Solution Preview

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Allied Electrons must purchase a new automatic soldering machine to meet increased demand for its electronic goods.  Of all the machines considered, management has narrowed the choices to the following three mutually exclusive machines.  Allied uses a planning horizon of four years (all three can last this long) and a MARR of 10%.  The initial cost is in week 0 and the payments are in years 1-4. Determine the present worth, future worth, and annual worth for

Machine 1 Machine 2 Machine 3
Initial Cost \$800,000 \$650,000 \$575,000
Annual Operating Cost \$50,000 \$90,000 \$105,000
Salvage value \$40,000 \$32,500 \$28,750

MARR 10%

a) When the salvage value is in year 4, and
Year Machine 1 Present Value Interest Factor (PVIF) Discounted Value Future Value Interest Factor (FVIF) Future Value
0 (\$800,000) 1.000 (\$800,000) 1.464 (\$1,171,280.000)
1 (\$50,000) 0.909 (\$45,455) 1.331 (\$66,550.000)
2 (\$50,000) ...

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