02 EOL2Model - 5 = $14,259.72 CASH FLOW (in constant...

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EGMT 531 CW / Quiz 2 - Solution Question: A machine has a first cost of $100,000 (in today's dollars) and a salvage value of $20,000 (in then current dollars) at the end of a five year life. The machine will provide savings of one workers salary and benefits per year over its life of five years. The salary and benefits for one worker are $30,000 (in today's dollars, at time zero. Operating and Maintenance, (O&M), costs are $10,000 per year. O&M escalation is expected to be at the rate of inflation which is 7%. Quiz Question - Construct a cash flow table showing cash flows in current dollars and in constant dollars (i.e., today's dollars). From question above only machine salvage value ($20,000) are stated in current/actual dollar. All other cash flows such as machine cost (-$100,000), savings ($30,000) and Convert salvage value of $20,000 into constant dollar: = 20,000 / (1.07)
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Unformatted text preview: 5 = $14,259.72 CASH FLOW (in constant dollar): Cash flow at year 0 = -$100,000 due to purchasing equipment Cash flow at year 1,2,3 & 4 = $30,000 - $10,000 = $20,000 (saving - O&M cost) Cash flow at year 5 = (salvage value + saving - O&M cost) = $14,259.724 + $30,000 - $10,000 = $34,259.72 CASH FLOW (in current dollar): Cash flow at year 0 = -$100,000 (constant dollar = current dollar at t = 0) Cash flow at year 1,2,3 & 4 = $20,000(1.07) n ; where n = 1,2,3,4 Cash flow at year 5 = $34,259.724(1.07) 5 = $48,051 year (n) Cash flow (in actual $) Conversion factor Cash flow (in constant $) ($100,000) (1 + 0.07) ($100,000) 1 $21,400.00 (1 + 0.07) 1 $20,000 2 $22,898.00 (1 + 0.07) 2 $20,000 3 $24,500.86 (1 + 0.07) 3 $20,000 4 $26,215.92 (1 + 0.07) 4 $20,000 5 $48,051.03 (1 + 0.07) 5 $34,259.72...
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