Answered: It is desired to determine the present…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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LOOK for the present value (selling price of the machine)
HINT: EQUATE THE 2 TOTAL COSTS using AWM

It is desired to determine the present economic value of an old machine by
considering how it compares with the best modern machine that could replace it. The old machine is expected to require out-of-pocket costs of ₱85,000 each year for 4 years and then be scrapped for
₱5,000 residual value. The new machine requires an investment of ₱40,000 and would have out-of-pocket costs of ₱79,000 a year for 8 years and then zero salvage value. Invested capital should earn aminimum return of 15% before taxes. Determine the present value of the old machine.

Old Machine
85,000
New Machine (x2)
OPC
Original
Cost- (Co)
Life (L)
Interest (i)
Original
Cost Co
Life (L)
avestmen
Costs;
40,000
4 years
8.
15%
79,000
Scrap Value
(C.)
Depreciatio
5,000
79,000(0.15+1)=45,168.50
85,00 – 5,000
1.15 - 1
Total cost: 45, 168.50 + 40,000 +16,021.23
= P101,109.13
(.15)= 16,021.23
n
Therefore the present value of an Old machine is P16,021.23

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