Time Value of Money Formulas Present equivalent of a single cash flow of value F

Question

Time Value of Money Formulas Present equivalent of a single cash flow of value F in the future P=F*((1/(1+i)^n) Present equivalent of a series of equal cash flows each with a value of A P=A*(((1 +i)^n)-1) (i*((l +i^n)) A company is considering the purchase of a new piece of testing equipment that is expected to produce $7,000 of income at the end of each of the next 7 years, je. $7000 at the end of year 1, $7000 at the end of year 2 and so on to the end of year 7.At the end of year 7 the testing equipment will be sold for $5000. a) Using an interest rate of 10% per year compounded annually, determine the Present equivalent of the annual $7000 income plus the Present equivalent of the $5000 income from the sale of the testing equipment Note: The present equivalent of the future income = present equivalent of the $7000 annuity + present equivalent of the $5000 from the sale of the equipment b) The new testing equipment will cost $35,000. Is purchase of the new testing equipment economically feasible?

Explanation / Answer

(a) Present value= 7000PVIFA(10%,7)+ 5000PVIF(10%,7)

= (7000x4.8684)+(1000x.5132)

= $36644.722

(b) Net present value= -epquiment cost+ present value

Net present value= -35000+36644.722

Net present value= $1644.722

Since the NPV of the above project is positive, it is a economically feasible project.

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