Labco Scientific sells high-purity chemicals to universities, research laborator

Question

Labco Scientific sells high-purity chemicals to universities, research laboratories, and pharmaceutical companies. The company wants to invest in new equipment that will reduce shipping costs by better matching the size of the completed products with the size of the shipping container. The new equipment is estimated to cost $460,000 to purchase and install. How much must Labco save each year for 4 years in order to justify the investment at an interest rate of 10% per year?

Labco must save $  each year.

Explanation / Answer

The formula used to calculate is, A = P(A/P, i, n)
We need to find value of A,
P = $460,000; i = 10%; and n = 4 years
A = P(A/P, i, n)
(A/P, i, n) = (0.1*(1+0.1)^4)/((1+0.1)^4-1) = 0.315
A = 460000*0.315 = 460000*0.315 = $144900

So, Labco must save $144900 each year to purchase new equipment

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