Question #273937

Pneumatics Engineering purchased a machine that had a first cost of $40,000, an expected useful life

of 8 years, a recovery period of 10 years, and a salvage value of $10,000. The operating cost of the

machine is expected to be $15,000 per year. The inflation rate is 6% per year and the company’s MARR

is 11% per year. Determine (a) the depreciation charge for year 3, (b) the present worth of the third-

year depreciation charge in year 0, the time of asset purchase, and (c) the book value for year 3

according to the straight line method.

Expert's answer

Payback period is the initial outflow recovery period.

Payback period = A+(-B/C)

A is year of last negative cumulative cash flows

B is last negative cumulative cash flows

C is Cash flows of A+1 year.

Profitability index is ratio of PV of inflow to PV of outflows.

Net present value is sum of present value of cash flows at a given discount rate.

NPV = PV of inflows - PV of outflows

Initial Cash outflow will consist of after tax cash flows sale of old machine and cash flow for the new machine i.e. cost of machine.

Net annual cash flows will consists of after tax change in profit plus the depreciation expense for the new machine.

Depreciation as per SLM = (Cost - salvage)/life

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