A new equipment has been proposed by engineers to increase the productivity of a welding operation of a local fabrication plant. The investment cost is $25,000, and the equipment will have a market value of $5,000 at the end of a study period of five years. Increased productivity attributable to the equipment will amount to $10,000 per year after operating costs have been subtracted from the revenue generated by the additional production. If MARR is 12%, is investing in this equipment feasible

Investing the the equipment id feasible because it has a positive NPV, thus implies that it will increase the wealth of the company by $13,884.8963

Explanation:

The NPV is the difference between the PV of cash inflows and the PV of cash outflows. A positive NPV implies a good investment decision and a negative figure implies the opposite.

NPV of an investment:

NPV = PV of Cash inflows - PV of cash outflow

Initial cost = 25,000

Present value of the cash inflow

PV of annuity= 1 -(1+r)^(-n)/r × Annual cash flow

A-10,000, r- 12%, n- 5

PV of annual cash inflow = 10,0000× (1- (1.12^(-5)/0.12=36,047.762

Present Value of Scrap value

PV = S×× (1+r)^(-n)

S- scrap value , n- 5, r 12%

PV of scrap Value = 5,000 × (1.12)^(-5)= 2,837.13

NPV= 36047.76202+ 2837.134279 - 25,000= 13,884.89

NPV =$13,884.89

Investing the the equipment id feasible because it has a positive NPV, thus implies that it will increase the wealth of the company by $13,884.8963