You invest in a piece of equipment costing $40,000. The equipment will be used for two years, and it will be worth $15,000 at the end of two years. The machine will be used for 4,000 hours during the first year and 6,000 hours during the second year. The expected savings associated with the use of the piece of equipment will be $28,000 during the first year and $40,000 during the second year. Your interest rate is 10%. (a) What is the capital recovery cost

The answer is given below;

Explanation:

Description            0                              1                               2

Equipment           (40,000)

Depreciation

(40,000/10,000)*4,000                       (16,000)

(40,000/10,000)*6,000                                                        (24,000)  

Savings                                                  28,000                     40,000

Salvage Value                                                                          15,000

Net Cash flows                                       12,000                       31,000

PV factor                                          1/1.1 =.91                         1/1.1^2=.83

Net present value

PV factor*net cash flows                   10,920                            25,730

(10,920+25,730)        36,650

Net present value  (40,000)+36,650=(3,350)