(engineering economic) a company considers purchasing a machine for $3000. The tool is planned to be used for 10 years and after that it will be sold for 25% of its purchase price. With the purchase of the tool, the company must incur operating costs of $ 400 per year. If the owner of the company wants a return of 10% annually on the investment made, what is the uniform annual income for at least 10 years that must be obtained from the heavy equipment so that the wishes of the owner of the company are fulfilled?
(engineering economic) a company considers purchasing a machine for $3000. The tool is planned to be used for 10 years and after that it will be sold for 25% of its purchase price. With the purchase of the tool, the company must incur operating costs of $ 400 per year. If the owner of the company wants a return of 10% annually on the investment made, what is the uniform annual income for at least 10 years that must be obtained from the heavy equipment so that the wishes of the owner of the company are fulfilled?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
(engineering economic ) a company considers purchasing a machine for $3000. The tool is planned to be used for 10
years and after that it will be sold for 25% of its purchase price. With the purchase of the
tool, the company must incur operating costs of $ 400 per year. If the owner of the company
wants a return of 10% annually on the investment made, what is the uniform annual income
for at least 10 years that must be obtained from the heavy equipment so that the wishes of
the owner of the company are fulfilled?
Expert Solution
Concept
We will use the concept of NPV to answer this. To justify the investment, the NPV should be zero. NPV is given by
NPV = PV of all cashflows - initial cost
PV = E(1-(1+r)-p)/r
Where
E = annual net cash inflows
r = interest rate required = 10%
p = period = 10 years
Note that tax information is not given so depreciation and capital won't have any effect.
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