Question

GMC purchased a $180,000 milling machine, which will be used for 5 years. The machine is expected to save the company $30,000 during the first year of operation. Then, the annual savings is expected to DECREASE by 3% per year over the previous year due to additional cost of maintenance. The machine is to be operated 5,000 hours per year (on average) and the machine is expected to have NO salvage value at the end of the 5-year project. Interest is 15% compounded annually. Determine the present worth, PW (15%), of all the savings in this problem. (Round your answer to the nearest dollar. Do not enter the $ symbol or use commas.)

Answer 1

Answer:

Explanation:

$\left[\begin{array}{ccc}Year&Cashflow&Present Value\\0&-180,000&-180,000\\1&30,000&26,086.9565\\2&29,100&22,003.7807\\3&28,227&18559.7107\\4&27,380.19&15,654.7125\\5&26,558.7843&13,204.4097\\Net&Value&-84,490.4299\\\end{array}\right]$

The first step will be calculate the alue of eachcash saving

mulitply by (1- 0.03) which is the rate at which the flow decrease.

Then we calculate the present value of each cashflow

$\frac{Principal}{(1 + rate)^{time} } = PV$

For example year 4:

$\frac{27,380.19}{(1 + 0.15)^{4} } = 15,654.7125$

Then we add all the cash saving and compare with the machien cost to calcuale the net present value of the machine