A machine costing $25,000 to buy and $3000 per year to operate will save mainly labor expenses in packaging over six years. the

Question

4 years ago

6

A machine costing $25,000 to buy and $3000 per year to operate will save mainly labor expenses in packaging over six years. the

anticipated salvage value of the machine at the end of six yeats is $5000 (a) if a 10% return on investment (rate of return) is desired, what is the minimum required annual savings in labor from this machine

Business

1 answer:

matrenka [14] · Answer 1 · 2021-12-09T14:09:58+03:00

$3388 is the minimum required annual savings

Explanation:

a) First we have to calculate the present value of the salvage amount:

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 = 10%; Nper = 6; PMT = 0; FV = -5000

Step4: Click "OK" to get the desired value.

The value comes to "$2,822.37"

Now, the present value is $25,000 plus $2,822 = $27,822

Calculating the annual cash inflows using excel sheet:

Step1: Go to excel and click "insert" to insert the function.

Step2: Select the "PMT" function as we are finding the annaul cash inflows

Step3: Enter the values as Rate = 10%; Nper = 6; PV = -27822; FV = 0

Step4: Click "OK" to get the desired value.

The value comes to " $6,388"

Therefore, the annual cash inflows are $6,388

To calculate the annual savings, we deduct the annual operating costs from annual cash inflows

Annual savings = $6,388 - $3,000

= $3,388