The XYZ corporation is planning to purchase an extruder at a purchase price of $350,000. XYZ plans to make down payment of 25% of the first cost of the extruder and to make a 7 year,10% yearly payment loan for the rest of the first cost of the extruder. XYZ believes that the extruder can be sold for $75,000 at the end of its 15 year service life. The new extruder will increase XYZ's annual income by $90,000. Maintenance and operating costs are expected to be $4000 during the first year and to increase by $1200 each year. XYZ uses a before tax MARR of 12% for its preliminary economic studies. What is the before tax present worth of the extruder to XYZ?

Question

The XYZ corporation is planning to purchase an extruder at a purchase price of $350,000. XYZ plans to make down payment of 25% of the first cost of the extruder and to make a 7 year,10% yearly payment loan for the rest of the first cost of the extruder. XYZ believes that the extruder can be sold for $75,000 at the end of its 15 year service life. The new extruder will increase XYZ's annual income by $90,000. Maintenance and operating costs are expected to be $4000 during the first year and to increase by $1200 each year. XYZ uses a before tax MARR of 12% for its preliminary economic studies. What is the before tax present worth of the extruder to XYZ?

Answer 1

Have you considered using a spreadsheet to calculate this?

Present value of 75K(fifteen years hence)+value of 90k/yr spread over fifteen years-operating and maintenance costs spread over years.

Answer 2

To calculate the before-tax present worth of the extruder to XYZ corporation, we need to determine the cash flows associated with the purchase, operation, and disposal of the extruder, and then calculate the present worth of these cash flows.

Step 1: Calculate the annual income from the extruder:
The extruder increases XYZ's annual income by $90,000.

Step 2: Calculate the cost of operating and maintaining the extruder annually:
The maintenance and operating costs are expected to be $4,000 in the first year and increase by $1,200 each year. Since the extruder has a service life of 15 years, we need to calculate the operating and maintenance costs for each year of its service life.

Year 1: $4,000
Year 2: $4,000 + $1,200 = $5,200
Year 3: $4,000 + ($1,200 × 2) = $6,400
...
Year 15: $4,000 + ($1,200 × 14) = $20,800

Step 3: Calculate the cash flows considering the purchase, operation, and disposal of the extruder:
a) Initial cash flow:
Purchase price - Down payment = $350,000 - 25% × $350,000 = $350,000 - $87,500 = $262,500.

b) Annual cash flows:
Annual income - Annual operating and maintenance cost

Year 1: $90,000 - $4,000 = $86,000
Year 2: $90,000 - $5,200 = $84,800
...
Year 15: $90,000 - $20,800 = $69,200

c) Cash flow at the end of the 15-year service life:
Extruder disposal price: $75,000

Step 4: Calculate the before-tax net present worth:
Using the before-tax MARR (12%), we can discount each cash flow to the present time and calculate the net present worth.

Net present worth = (Cash flow Year 1 / (1 + MARR)^1) + (Cash flow Year 2 / (1 + MARR)^2) + ... + (Cash flow Year 15 / (1 + MARR)^15) + (Disposal cash flow / (1 + MARR)^15) - Initial cash flow

Substituting the values:
Net present worth = ($86,000 / (1 + 0.12)^1) + ($84,800 / (1 + 0.12)^2) + ... + ($69,200 / (1 + 0.12)^15) + ($75,000 / (1 + 0.12)^15) - $262,500

Calculation of each discounted cash flow depends on the accurate values of MARR and the corresponding year. Use a calculator or spreadsheet software to calculate each discounted cash flow and then sum them up to find the before-tax present worth of the extruder to XYZ corporation.