3) The owner of a business is considering investing $ 55,000 in new equipment. S

Question

3) The owner of a business is considering investing $ 55,000 in new equipment. She 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 % compounded annually. (a) Determine the annual capital recovery cost (ownership cost) for the equipment. (b) Determine the equivalent annual savings (revenue). (c) 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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