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19 December, 11:32

A new packaging machine will cost $57,000. The existing machine can be sold for $5,000 now and the new machine for $7,500 after its 10-year useful life. If the new machine reduces annual expenses by $5,000, what is the present worth at 25% of this investment?

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  1. 19 December, 14:11
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    Our answer is $ 33,342

    Explanation:

    Initial investment = Cost of new machine - Salvage value of old machine = $ 57,000 - $ 5,000 = $ 52,000

    Annual cost savings = $ 5,000

    Present value of cash savings at a discount rate of 25% = Annuity x PVIFA 25%, 10 years + Salvage x PVIF 25%, 10th year = $ 5,000 x 3.5705 + $ 7,500 x 0.1074 = $ 17,852.5 + $ 805.5 = $ 18,658

    Net present value = Present value of cash savings - Initial investment = $ 18,658 - $ 52,000 = $ (33,342)
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