A machine used to shred cardboard boxes for composting has a first cost of $10,000, an AOC of $7000 per year, a 3-year life, and no appreciable salvage value. Assume you were told that the service provided by the machine will be needed for only 5 years, which entails a repurchase and retention for only 2 years. What salvage value, S, is required after 2 years in order to make the 2-year AW value the same as it is for its 3-year life cycle AW? Assume i = 10% per year. Solve using factors and, if assigned, using a spreadsheet and Goal Seek.
What will be an ideal response?
Factors: -10,000(A/P,10%,3) – 7000 = -10,000(A/P,10%,2) – 7000 + S(A/F,10%,2)
-10,000(0.40211) – 7000 = -10,000(0.57619) – 7000 + S(0.47619)
-11,021 = -12,762 + 0.47619S
S = $3656
Spreadsheet: The answer is the G3 display of $3656
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