Question

A new semi-automatic machine costs $ 80,000 and is expected to generate revenues of $ 40,000 per year for 6 years. It will cost $ 25,000 per year to operate the machine. At the end of 6 years, the machine will have a salvage value of $ 10,000. Evaluate the investment in this machine using all four methods (payback period, present worth, uniform annual cost (UAC), and rate of return). Neglect the salvage value f

Answer 1

Answer:

The complete part of the question is found below:

Neglect the salvage value for payback period rate of return

Applicable rate of return is 15%

Answers:

Payback is 5.33 years

Present worth is -$18,909.48

UAC is -$ 4,996.58

Rate of return is 18.75%

Explanation:

In case of an even cash flow like this when the net cash flow yearly is $15,000($40,000-$25000), the payback period is initial investment/net annual cash flow

Payback=$80,000/$15,000= 5.33  years

Present is computed thus

Year   cash flow discount factor  pv=cash flow*discount factor

0        -$80,00       1/(1+0.15)^0      (80,000.00)

1         $15000         1/(1+0.15)^1      13,043.48  

2         $15000        1/(1+0.15)^2      11,342.16  

3         $15,000        1/(1+0.15)^3       9,862.74  

4         $15,000       1/(1+0.15)^4         8,576.30  

5         $15,000      1/(1+0.15)^5          7,457.65  

6         $25,000     1/(1+0.15)^6           10,808.19  

present worth                                     (18,909.48)

The uniform annual cost=NPV*r/(1-(1+r)^-n

NPV is -$18,909.48*0.15/(1-(1+0.15)^-6)

            =-$ (2,836.42) /0.567672404

           =-$ (4,996.58)

The rate of return can be computed thus:

rate of return=annual cash flow/initial investment*100

annual cash flow is $15000

initial investment is $80,000

rate of return=15,000/80000*100

                      =18.75%