Kal Tech Engineering Systems is considering buying a CNC machining center for its operation in Tennessee. The net benefits in the first year is estimated to be $40,000 and increasing at the rate $5,000 for the next four years and stays at the same level as that of year 5 for the next 5 years. If MARR is 8%, determine the amount of money that the company can invest justifying on this machining center. A salvage value of 20% of the initial cost is reasonable to assume at the end of year 10.

If investment amount is at most equals to $396,311.20 then this project is justifiable.

Explanation:

Lets find Present worth of this project so that this calculated present worth amount equals to the amount of money that the company can invest

Present worth of project = Sum of discounted future cash flow over the life of project  = PW of Benefits + PW of Salvage value

X=(40000/1.08)+(45000/1.08^2)+(50000/1.08^3)+(55000/1.08^4)+(60000/1.08^5)+(60000/1.08^6)+(60000/1.08^7)+(60000/1.08^8)+(60000/1.08^9)+(60000/1.08^10)+(0.2X/1.08^10)

X=359612.8+0.2X/(1.08^10)

X=359612.8+0.0926X

0.9074X=359612.8

X = 359612.8/0.9074

X = 396311.2

Conclusion: if investment amount is at most equals to $396311.2 then this project is justifiable

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