W has taken loan of $50,000 at 4.2% interest rate and need to make monthly payments for 10 years. Present value of an annuity is the current value of future payment or the present value of a series of future periodic payments made at the end of each payment period. P V Annuity = P M T [ 1 − 1 ( 1 + r ) n r ] Here, The present value of an annuity is “ P V Annuity ”. The periodic payments are “ PMT ”. The interest rate is “ r ”. The maturity period of number of years is “ n ”.

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Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $75,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $7,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $50,000. The firm's tax rate is 25%, and the…

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Chapter 4, Problem 23PROB

Summary Introduction

W has taken loan of $50,000 at 4.2% interest rate and need to make monthly payments for 10 years.

Present value of an annuity is the current value of future payment or the present value of a series of future periodic payments made at the end of each payment period.

PVAnnuity=PMT[1−1(1+r)nr]

Here,

The present value of an annuity is “PVAnnuity”.

The periodic payments are “PMT”.

The interest rate is “r”.

The maturity period of number of years is “n”.

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