A Company is trying to determine if they should invest in a project of purchasin

Question

A Company is trying to determine if they should invest in a project of purchasing an equipment. The initial $10 million investment is needed. Also, this project is estimated to have 5 year useful service life with salvage of $1 million. The company can have a net save of $5 million per year if they invest in this project. The interest rate is 15% compounded annually:

A. Find the Equivalent savings per product, if 5,000 products can be produced per year by investing this particular project?

B. Consider following table as the rate of product in each year, in the 5-year service period of this project, in this case, find the Equivalent savings per product?

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Explanation / Answer

Amounts are in millions Year Cashflow Interest Present value Products ESPP 0 -10 15% -10.00 1 5 15% 4.35 5000 0.000869565 2 5 15% 3.78 5000 0.000756144 3 5 15% 3.29 5000 0.000657516 4 5 15% 2.86 5000 0.000571753 5 6 15% 2.98 5000 0.000596612 Amounts are in millions Year Cashflow Interest Present value Products ESPP 0 -10 15% -10.00 1 5 15% 4.35 1500 0.002898551 2 5 15% 3.78 2500 0.001512287 3 5 15% 3.29 2500 0.001315032 4 5 15% 2.86 2000 0.001429383 5 6 15% 2.98 1500 0.001988707

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