The company you work for has a high speed 5-axis milling machine which was purch
ID: 1254830 • Letter: T
Question
The company you work for has a high speed 5-axis milling machine which was purchased 5 years ago for $200,000 and has a 10 year life. This machine is currently idle and can be used to make a product designed by a research institute which requires at $10,000 license fee to use their design. Tooling costs $5000. Materials and consumables (cutting fluids, milling cutters, power, etc) are budgeted at $40 per product. Your company applies an overhead rate of 25% on all direct costs to cover indirect costs.The market has changed since your company bought the machine; it now seems possible that it could be sold for as much as $20,000 5 years from now; If the present value is $16,438.54 how it will affect the company's taxes?
Explanation / Answer
According to the given information,
The machine will be sold in 5 years for $20,000.
Interest rate (Rate) = 4%
Number of years (Nper) = 5
Future value (FV) = $20,000
Here, we have to calculate the present value for 5 yrs, at 4%
The interest rate is indicated with "Rate", Number of years with "Nper" and Future value with "FV". The present value is denoted with "PV"
Calculating the present value using excel sheet.
Step1: Go to excel and click "Insert" to insert the function.
Step2: Select the "PV" function as we are finding the present value in this case.
Step3: Enter the values as Rate = 4%, Nper = 5; PMT = 0; FV = -20000
Step4: Click "OK" to get the desired value.
The value comes to "$16,438.54"
Therefore, the present value is $16,438.54
Note: The future value is always denoted with negative sign.