The owner of a business is considering investing $55,000 in new equipment. He es

Question

The owner of a business is considering investing $55,000 in new equipment. He estimates that the net cash flows will be $5,000 during the first year and will increase by $2,500 per year each year thereafter. The equipment is estimated to have a 10-year service life and a net salvage value at the end of this time of $6,000. The firm's interest rate is 12%. Determine the annual capital cost (ownership cost) for the equipment. Determine the equivalent annual savings (revenues). Determine whether this investment is wise.

Explanation / Answer

A B C D = A+B+C P E = D x P Year Investment Opearational Cash Inflow Salvage Value Total Cash Flow PV factor ( @ 12 %) - Refer Present Value Factor Table Present Value Cash Flow 0 -55,000 -55,000 1.0000 -55,000 1 5,000 5,000 0.8929 4,464 2 7,500 7,500 0.7972 5,979 3 10,000 10,000 0.7118 7,118 4 12,500 12,500 0.6355 7,944 5 15,000 15,000 0.5674 8,511 6 17,500 17,500 0.5066 8,866 7 20,000 20,000 0.4523 9,047 8 22,500 22,500 0.4039 9,087 9 25,000 25,000 0.3606 9,015 10 27,500 6,000 33,500 0.3220 10,786 Total Benefit 25,818

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