Question

A machine costing $25,000 to buy and $3000 per year to operate will save mainly labor expenses in packaging over six years. the anticipated salvage value of the machine at the end of six yeats is $5000 (a) if a 10% return on investment (rate of return) is desired, what is the minimum required annual savings in labor from this machine

Answer 1

The minimum required annual savings in labor from this machine is $34,545.45.

Step-by-step explanation:

To calculate the minimum required annual savings in labor from this machine, we need to consider the total cost of the machine over six years and the desired rate of return. The initial cost of the machine is $25,000, and the annual operating cost is $3,000. The salvage value at the end of six years is $5,000.

The formula to calculate the minimum required annual savings in labor is:

Minimum required annual savings = (Initial cost + Annual operating cost - Salvage value) / (1 + Rate of return)

Plugging in the values:

Minimum required annual savings = ($25,000 + $3,000 * 6 - $5,000) / (1 + 0.10)

Simplifying the equation:

Minimum required annual savings = $25,000 + $18,000 - $5,000 / 1.10 = $38,000 / 1.10 = $34,545.45

Therefore, the minimum required annual savings in labor from this machine is $34,545.45.

Answer 2

$3388 is the minimum required annual savings

Step-by-step explanation:

a) First we have to calculate the present value of the salvage amount:

Step1: Go to excel and "click" insert to insert the function.

Step2: Select the "PV" function as we are finding the present value in this case.

Step3: Enter the values as Rate = 10%; Nper = 6; PMT = 0; FV = -5000

Step4: Click "OK" to get the desired value.

The value comes to "$2,822.37"

Now, the present value is $25,000 plus $2,822 = $27,822

Calculating the annual cash inflows using excel sheet:

Step1: Go to excel and click "insert" to insert the function.

Step2: Select the "PMT" function as we are finding the annaul cash inflows

Step3: Enter the values as Rate = 10%; Nper = 6; PV = -27822; FV = 0

Step4: Click "OK" to get the desired value.

The value comes to " $6,388"

Therefore, the annual cash inflows are $6,388

To calculate the annual savings, we deduct the annual operating costs from annual cash inflows

Annual savings = $6,388 - $3,000

= $3,388