Question

You invest in a piece of equipment costing $40,000. The equipment will be used for two years, and it will be worth $15,000 at the end of two years. The machine will be used for 4,000 hours during the first year and 6,000 hours during the second year. The expected savings associated with the use of the piece of equipment will be $28,000 during the first year and $40,000 during the second year. Your interest rate is 10%. (a) What is the capital recovery cost

Answer 1

The answer is given below;

Step-by-step explanation:

Description 0 1 2

Equipment (40,000)

Depreciation

(40,000/10,000)*4,000 (16,000)

(40,000/10,000)*6,000 (24,000)

Savings 28,000 40,000

Salvage Value 15,000

Net Cash flows 12,000 31,000

PV factor 1/1.1 =.91 1/1.1^2=.83

Net present value

PV factor*net cash flows 10,920 25,730

(10,920+25,730) 36,650

Net present value (40,000)+36,650=(3,350)