A new machine can be purchased today for $450,000. The annual revenue from the machine is calculated to be $72,000, and the equipment will last 10 years. Expect the maintenance and operating costs to be $4500 a year and to increase $750 per year. The salvage value of the machine will be $35,000. What is the rate of return for this machine

7.98%

Explanation:

The Rate of Return (ROR) is the gain or loss of an investment over a period of time compared to the initial cost

Starting year 2, Annual O&M cost in year N = Annual O&M cost in year (N - 1) + $750

Annual net benefit  = Annual revenue - Annual O&M cost

In year 10, Annual revenue ($) = 72,000 + 35,000 salvage value = 107,000

Rate of Return (ROR) of Annual net benefit is computed using Excel11 IRR function as follows.

Year (N)Revenue ($)Cost ($)NAB ($)

0                                     4,50,000 -4,50,000

1               72,0004,50067,500

2               72,0005,25066,750

3               72,0006,00066,000

4               72,0006,75065,250

5               72,0007,50064,500

6               72,0008,25063,750

7               72,0009,00063,000

8               72,0009,75062,250

9               72,00010,50061,500

10              1,07,00011,25095,750

ROR of NAB =7.98%

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