Question

K Manufacturing would like to install a machine costing $37,500 with a life of 12 years to bring in benefits to the company of $5,100 per month. The monthly expenses for the machine are $4,650. If the MARR that the company uses is 12% per year, what should be the minimum salvage value as a percentage of the initial machine cost that the company should get at the end of the machine life to justify installing the machin

Answer 1

$12,585

Step-by-step explanation:

initial investment = -$37,500

then you have 143 cash flows = $5,100 - $4,650 = $450

the last cash flow = $450 + salvage value

we can use an annuity factor to determine the present value of the first 143 payments = $450 x 75.89853 (PV annuity factor, 1%, 143 periods) = $34,154.34

not considering the last cash flow, the NPV = -$37,500 + $34,154.34 = $3,345.66

we need to find the future value of $3,345.66:

FV = $3,345.66 x (1 + 12%)¹² = $13,034.61

the last cash flow = $13,034.61

salvage value = $13,034.61 - $450 = $12,584.61 ≈ $12,585