The National Potato Cooperative purchased a de-skinning machine last year for $150,000. Revenue for the first year was $50,000. Over the total estimated life of 8 years, use a spreadsheet to estimate the remaining equivalent annual revenues (years 2 through 8) to ensure breakeven by recovering the investment and a return of 10% per year. Costs are expected to be constant at $42,000 per year and a salvage value of $10,000 is anticipated.
What will be an ideal response?
Let R = revenue for years 2 through 8. Set up PW = 0 relation.
PW = Revenue – costs
0 = 50,000(P/F,10%,1) + R(P/A,10%,7)(P/F,10%,1)
-150,000 + 10,000(P/F,10%,8) – 42,000(P/A,10%,8)
R = -50,000(0.9091) + 150,000 - 10,000(0.4665) + 42,000(5.3349)
(4.8684)(0.9091)
= 323,946/4.4259
= $73,193 per year
Spreadsheet solution uses Goal Seek to find R = $73,195 with the remaining revenue cells set equal to this value.
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