ABC Inc. must purchase a welding machine. The following is known about the machi
ID: 2750909 • Letter: A
Question
ABC Inc. must purchase a welding machine. The following is known about the machine and about possible cash flows.
p=.40
p=.30
p=.30
First cost
$20,000
$20,000
$20,000
Annual savings
1,000
2,500
4,000
Annual costs
6,000
4,000
3,000
Actual salvage value
2,000
2,500
3,250
The machine is expected to have a useful life of 8 years. The company has a MARR of 7%. Determine the NPW of the machine.
p=.40
p=.30
p=.30
First cost
$20,000
$20,000
$20,000
Annual savings
1,000
2,500
4,000
Annual costs
6,000
4,000
3,000
Actual salvage value
2,000
2,500
3,250
Explanation / Answer
First calculate all the expected value of each line item as follows
Initial Cost = 20,000
Annual Savings = 0.4 * 1000 + 0.3 * 2500 + 0.3 * 4000 = 2350
Annual Costs = 0.4 * 6000 + 0.3 * 4000 + 0.3 * 3000 = 4500
Actual Salvage value = 0.4 * 2000 + 0.3 * 2500 + 0.3 * 3250 = 2525
Cash flows each year are in the following table
year 8 cash flow = -2150 + 2525 = 375
NPW which is net present worth can be calculated as follows
NPW =NPV(7%,B3:B10) - 20000 = -31,368.72
Year Cash flow 0 (20,000.00) 1 (2,150.00) 2 (2,150.00) 3 (2,150.00) 4 (2,150.00) 5 (2,150.00) 6 (2,150.00) 7 (2,150.00) 8 375.00