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24 February, 21:11

Bonka Toys is planning to buy a robot costing $75,000. After 5 years its salvage value will be $18,000. An overhaul costing $10,000 will be needed in Year 3. Operations and Maintenance costs will be $2000 per year. What is the cash flow stream for using this robot? (Hint: cash flow stream is a set of yearly cash flows for purchasing, using, and selling this robot).

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  1. 24 February, 21:22
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    Question:

    Bonka Toys is planning to buy a robot costing $75,000. After 5 years its salvage value will be $18,000. An overhaul costing $10,000 will be needed in Year 3. Operations and Maintenance costs will be $2000 per year. What is the cash flow stream for using this robot? (Hint: cash flow stream is a set of yearly cash flows for purchasing, using, and selling this robot).

    Assuming an interest rate of 10%

    Note this was added by the tutor

    Equivalent annual cost = $2646.41

    Explanation:

    The cash flow stream = Present value of cost / Annuity factor

    PV of cost

    PV of salvage value = 8,000 * 1.1^ (-4) = 5464.107

    PV of operating cost = 2000 * (1 - 1.1^-4) / 0.1) = 6339.730

    PV of overhaul costing = 10,000 * 1.1^ (-3) = 7513.148

    Present value (PV) of total cost:

    = 6339.73 + 7513.148 - 5464.10=8388.77

    Annuity factor for 4 years at 10% = 3.1698

    Cash flow stream = 8388.771 / 3.1698

    =$ 2,646.41

    Equivalent annual cost = $2646.41
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