Question

A new machine can be purchased today for $450,000. The annual revenue from the machine is calculated to be $72,000, and the equipment will last 10 years. Expect the maintenance and operating costs to be $4500 a year and to increase $750 per year. The salvage value of the machine will be $35,000. What is the rate of return for this machine

Answer 1

7.98%

Step-by-step explanation:

The Rate of Return (ROR) is the gain or loss of an investment over a period of time compared to the initial cost

Starting year 2, Annual O&M cost in year N = Annual O&M cost in year (N - 1) + $750

Annual net benefit = Annual revenue - Annual O&M cost

In year 10, Annual revenue ($) = 72,000 + 35,000 salvage value = 107,000

Rate of Return (ROR) of Annual net benefit is computed using Excel11 IRR function as follows.

Year (N) Revenue ($) Cost ($) NAB ($)

0 4,50,000 -4,50,000

1 72,000 4,500 67,500

2 72,000 5,250 66,750

3 72,000 6,000 66,000

4 72,000 6,750 65,250

5 72,000 7,500 64,500

6 72,000 8,250 63,750

7 72,000 9,000 63,000

8 72,000 9,750 62,250

9 72,000 10,500 61,500

10 1,07,000 11,250 95,750

ROR of NAB = 7.98%