Please Answer Using Excel A machine has an initial cost of $90,000 in today’s do
ID: 2428713 • Letter: P
Question
Please Answer Using Excel
A machine has an initial cost of $90,000 in today’s dollars (real) and a salvage value of $25,000 at the end of its 10 year useful life. The machine offers annual benefits of $30,000. Associated maintenance costs are $10,000 at the end of the first year expected to increase at a rate of 5% each year. If all projections except the initial cost are in then-current dollars (actual) and the average inflation rate over the analysis period is approximately 4%
a. Provide an estimate of before tax cash flows for each year in today’s dollars
b. Given a MARR of 10% what is the NPV of this investment before and after adjusting for inflation
Explanation / Answer
Initial Cost=$90000
Salvage Value=$25000
Life= 10 years
Annual Benefits=$30000
Annual Maintenance Cost=$10000 and increases by 5% each year
Inflation Rate =4%
Ans a)
Estimate for each year cash flow in Todays dollar
formula will be =CF/(1+MARR)^t....Cash Flow for year t discounted by MARR to today s dollar
For year 1=(Annual Benefit-Annual Cost)/(1+MARR)=(30000-10000-90000)/(1.1)=-63636.7
For year 2=(30000(1.05)-10000)/(1.1)^2=17768.6
For year 3=(30000(1.05)^2-10000)/(1.1)^3=17336.6
For year 4=(30000(1.05)^3-10000)/(1.1)^4=16890.07
For year 5=(30000(1.05)^4-10000)/(1.1)^5=16432.8
For year 6=(30000(1.05)^5-10000)/(1.1)^6=15968.09
For year 7=(30000(1.05)^6-10000)/(1.1)^7=15498.8
For year 8=(30000(1.05)^7-10000)/(1.1)^8=15027.6
For year 9=(30000(1.05)^8-10000)/(1.1)^9=14556.6
For year 10=(30000(1.05)^9-10000+25000)/(1.1)^10=$23726.3
Ans b)
NPV before inflation adjust is the sum of all PV calculated in part a) is $73,135.96
After adjusting for inflation it will be calculated as below CF/((1+MARR)*(1+Inflation rate))^t for period t disculted back to today s dollars
The answer is after adjusted for inflation =$33217.3