Question 253176: Break-even and annual equivalent analysis:
1) The owner of a workshop is planning to purchase a special machine for
$50,000. The annual operating cost (such as fuel, labor, and power) is expected to be
$8,000 per year. If the machine has a useful life of 12 years, what is the minimum
required annual equivalent revenue needed to break even with an 8% annual interest
rate? Assume that the machine would have an estimated market value of $5,000 at the end of its useful life.
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! The cost for the machine is $50,000
The salvage value for the machine is $5,000 in 12 years.
The present worth of the salvage value is $5,000 / (1.08)^12 = $1985.568793
The present value of $8,000 annual expenses for 12 years is $60,288.62414
Total Present Value of Costs = $50,000 + $60,288.62414 - $1985.568793 = $108,303.0553
You need Present Value of Annual Revenues for 12 years to equal $108,303.0553
Annual Revenues = $14,371.27576
Click on the following link to see the cash flow analysis.
http://theo.x10hosting.com/problems/253176.html
time point 0 is the beginning of year 1.
time point 1 is the end of year 1.
time point 12 is the end of year 12.
investment is made at the beginning of year 1 which is time point 0.
all other revenues and expenses and salvage values are end of year values.
present value calculations are made to the beginning of year 1 which is time point 0.
when using excel, you have to be careful, because they will present worth one more year than is normally done.
Instead of present worthing to time point 0, they are actually present worthing to time point -1.
because of that I made an adjustment.
I multiplied the EXCEL present Value by 1 + the rate of return in order to bring it back up one year to where it belonged.
Other than that, EXCEL works fine as far as I can tell so far.
MARR is 8% which is the rate of return of the problem.
NPV at MARR is 0 because the present worth of the costs cancels out the present worth of the revenue.
IRR is 8% because the NPV is 0 at that rate of return.
If you have any questions or comments, feel free to send me an email.
Salvage and Market Value at the end of the machine's life mean the same thing.
It's just another form of revenue for this cash flow analysis.
|
|
|
