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    The survey firm MAP is considering purchasing GPS equipment that would cost $28,000 initially with annual income of $13,000, operating costs of $2,500 increasing by $1,000 each year, insurance of $500, and a recalibration cost of $4,000 in year 4. With a salvage value of 10% of initial cost after 8 years and a required rate of return of 5%, the purchase would be profitable based on the annual equivalent revenues of $13,293 exceeding the annual equivalent costs of $10,994.

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    Add Notes For Chapter 6

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    The survey firm MAP is considering purchasing GPS equipment that would cost $28,000 initially with annual income of $13,000, operating costs of $2,500 increasing by $1,000 each year, insurance of $500, and a recalibration cost of $4,000 in year 4. With a salvage value of 10% of initial cost after 8 years and a required rate of return of 5%, the purchase would be profitable based on the annual equivalent revenues of $13,293 exceeding the annual equivalent costs of $10,994.

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    The survey firm MAP is considering purchasing GPS equipment that would cost $28,000 initially with annual income of $13,000, operating costs of $2,500 increasing by $1,000 each year, insurance of $500, and a recalibration cost of $4,000 in year 4. With a salvage value of 10% of initial cost after 8 years and a required rate of return of 5%, the purchase would be profitable based on the annual equivalent revenues of $13,293 exceeding the annual equivalent costs of $10,994.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    59 views1 page

    Add Notes For Chapter 6

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    Afiq de Winner
    The survey firm MAP is considering purchasing GPS equipment that would cost $28,000 initially with annual income of $13,000, operating costs of $2,500 increasing by $1,000 each year, insurance of $500, and a recalibration cost of $4,000 in year 4. With a salvage value of 10% of initial cost after 8 years and a required rate of return of 5%, the purchase would be profitable based on the annual equivalent revenues of $13,293 exceeding the annual equivalent costs of $10,994.

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    of 1

    Eg. 1.

    The survey firm of Myers, Anderson, and Pope (MAP) LLP is considering the purchase of a piece of new
    GPS equipment. Data concerning the alternative under consideration are presented below.

    Initial outlay (year 0) $28,000


    Annual Income $13,000
    Annual Operating Costs $2,500 in year 1 and increase by $1000 each yr
    Annual Insurance expenses $500
    Recalibration at the end of year 4 $4,000
    Salvage Value 10% of initial outlay

    If the equipment has a life of eight years and MAP’s MARR is 5%,

    a. Calculate the annual equivalent revenues (Total Revenues)


    TR = Annual income + Salvage value = 13,000 + (0.1 x 28,000 (A/F, 5%,8) = 13,293.16

    b. Calculate the annual equivalent cost (Total cost)


    Initial outlay = 28,000(A/P, 5%, 8) = 4,331.6
    Operating cost = 2500 + 1000(A/G,5%,8) = 5,744
    Insurance = 500
    Recalibration end of year 4 = 4,000(P/F, 5%, 4)(A/P, 5%, 8) = 418.8
    TC = 10,994

    c. Based on your answer in (a) and (b) above, should MAP purchase the equipment?
    Profit = TR – TC = 13,293 – 10,994 = 2,299 Yes

    Eg. 2 Ronald McDonald decides to install a fuel storage system for his farm that will save him an estimated 6.5
    cents/gallon on his fuel cost. He uses an estimated 20,000 gallons/year on his farm. Initial cost of the
    system is $10,000 and the annual maintenance the first year is $25 and increases by $25 each year
    thereafter. After a period of 10 years the estimated salvage is $3,000. If money is worth 12%, is it a wise
    investment?

    Annual equivalent cost = 10,000(A/P, 12%, 10) + 25 + 25(A/G, 12%, 10) = $1,884.63
    Annual equivalent savings/revenues = 20,000(.065) + 3,000(A/F, 12%, 10) = $1,471.00
    Annual equivalent worth = -$413.63 ∴ not a wise investment

    Eg.3 Calculate the AW for the following cash flow. Assume the MARR is 12% per year
    Year Amount
    Initial investment 0 8 million
    Initial investment 1 5 million
    Annual operating cost 1-8 0.9 million
    Salvage value 8 0.5 million

    Method I:
    Annual Worth = [- 8 - 5(P/F,12%,1)](A/P,12%,8) – 0.9 + 0.5(A/F,12%,8)
    = [-8.0-5.0*(.8929)](.2013) - 0.9 + 0.5*(.0813)
    = $-3.37 million

    Method II:
    CR = [-8.0 - 5.0(P/F,12%,1) + 0.5(P/F,12%,8)](A/P,12%,8)
    = [-8.0-5.0*(.8929) + 0.5*(.4039)](.2013)
    = $-3.37 million

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