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The sch of technology, art, and design STAD is considering buying a package machine for its...

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Accounting

The sch of technology, art, and design STAD isconsidering buying a package machine for its Engineering Technologyprogram. it is expected that this machine will generate a revenuefor the school through several projects and partnership with localcompanies. it is estimated that the net profit in the first yearwill be $75000 and decreasing at the rate of $10000 for the nextfive years after that profit stays constant at $7000 until the endof its time life (10 years). if interest rate is 10%, determine theamount of money that the STAD can invest on this machine.
assume there is no salvage value of the machine.
b)determine the equivalent annual for the following cashflow:
year 0-------0
year 1-------$200,000
year 2-------$180,000
year 3-------$160,000
year 4-------$140,000
year 5-------$120,000
year 6-------$100,000
year 7-------$80,000
year8-------$60,000

Answer & Explanation Solved by verified expert
4.3 Ratings (637 Votes)

(a) Amount of money that STAD can invest on this machine = Present value of future benefits expected from this project. = 242,328

Thus it indicates the maximum amount that STAD can invest, but not the actual investment.

Year CF DF PV
1 75000 0.909091 68181.82
2 65000 0.826446 53719.01
3 55000 0.751315 41322.31
4 45000 0.683013 30735.61
5 35000 0.620921 21732.25
6 25000 0.564474 14111.85
7 7000 0.513158 3592.107
8 7000 0.466507 3265.552
9 7000 0.424098 2968.683
10 7000 0.385543 2698.803
Total Present value 242328

Question - 2

Equivalent annual cash flow = Total present value / PVIFA = =139910.43

Year CF DF PV
1 200000 0.909091 181818.2
2 180000 0.826446 148760.3
3 160000 0.751315 120210.4
4 140000 0.683013 95621.88
5 120000 0.620921 74510.56
6 100000 0.564474 56447.39
7 80000 0.513158 41052.65
8 60000 0.466507 27990.44
Total 5.334926 746411.8

Equivalent annual cash flow = 746,411.80 / 5.334926 =139910.43

PVIFA = Present value of Interest factor annuity = Total of DF ( Discounting factors column)

Comment for any further clarification ........ all the best
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