You invest in a piece of equipment costing 30000 The equipme

You invest in a piece of equipment costing $30,000. The equipment will be used for two years, at the end of which time the salvage value of the machine is expected to be $10,000. The machine will be used for 5,000 hours during the first year and 8,000 hours during the second year. The expected annual net savings in operating costs will be $25,000 during the first year and $40,000 during the second year. If your interest rate is 10%, what would be the equivalent net savings per machine-hour?

Solution

Capital cost

CR(10%) = (30000-10000)*(A/P,10%,2) +10000*(0.10) = (20000*0.5792 )+ 1000 = 12584

AE( savings , 10%) = [25000 (P/F,10,1) +40000 (P/F,10,2)]*(A/P,10%,2)=32,311

Net annual savings = 32311-12584=19727

Average hours per year = [(P/F,10,1)*(5000)+(P/F,10,2)*(8000)]*(A/P,10%,2) = 6462

19727=6462*C(net savingsper machine hour)

C=$3.05 per hours approximately or $3