02 EOL2Model

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

This preview shows page 1. Sign up to view the full content.

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)
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

## This note was uploaded on 05/12/2010 for the course BUSINESS BS515 taught by Professor Johnson during the Fall '09 term at Drexel.

Ask a homework question - tutors are online