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Question 8
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Your company is interested in investing in a new machining center to meet increased demand for the next ten years. However, the purchase price is
still being negotiated.
• The new center is expected to generate $10,000 in new revenue in its first year of use.
• As demand increases revenue is expected to increase annually by $5,000 each year (i.e. each year is an increase over the previous year's
revenue), in years 2 through 9.
• At the end of the 9th year, you expect to have to replace the equipment with newer technology and expect to have a salvage value of 10% of the
purchase price.
• Further, you anticipate that the machine will need to be fully overhauled every 4 years to keep it in peak condition. The cost for each overhaul is
expected to be $7,500.
If you expect to have a net present worth of $100,000 for this investment opportunity, which of the following best represents the maximum
investment that your company should be prepared to make? Assume that MARR is 11%.
IE 320 Formula Sheet 01272017.pdf
Interest Tables.pdf
A. $138,936
B. $144,588
C. $37,650
D. $40,520
