Bonka Toys is planning to buy a robot costing $75,000. After 5 years its salvage value will be $18,000. An overhaul costing $10,000 will be needed in Year 3. Operations and Maintenance costs will be $2000 per year. What is the cash flow stream for using this robot? (Hint: cash flow stream is a set of yearly cash flows for purchasing, using, and selling this robot).

Question:

Bonka Toys is planning to buy a robot costing $75,000. After 5 years its salvage value will be $18,000. An overhaul costing $10,000 will be needed in Year 3. Operations and Maintenance costs will be $2000 per year. What is the cash flow stream for using this robot? (Hint: cash flow stream is a set of yearly cash flows for purchasing, using, and selling this robot).

Assuming an interest rate of 10%

Note this was added by the tutor

Equivalent annual cost = $2646.41

Explanation:

The cash flow stream = Present value of cost / Annuity factor

PV of cost

PV of salvage value = 8,000 * 1.1^ (-4) = 5464.107

PV of operating cost = 2000 * (1 - 1.1^-4) / 0.1) = 6339.730

PV of overhaul costing = 10,000 * 1.1^ (-3) = 7513.148

Present value (PV) of total cost:

= 6339.73 + 7513.148 - 5464.10=8388.77

Annuity factor for 4 years at 10% = 3.1698

Cash flow stream = 8388.771 / 3.1698

=$ 2,646.41

Equivalent annual cost = $2646.41