The aged but cenrally located golf course you manage does not have a in-ground a
ID: 2657102 • Letter: T
Question
The aged but cenrally located golf course you manage does not have a in-ground automated water sprinkling system. Instead, to properly water the course, sprinklers and hoses must be repeatedly set, moved, and put away by some of the grounds crew a tedious and laborious task. If over the next 12 years, you project annual savings of about $40,000 from having an automated system, what is the maximum price you would be willing to pay today for an installed, automated golf course sprinkler system? (Assume a interest rate of 6% and you may ignore income taxes)
VARIABLES MUST BE SHOWN
A. Redo your calculation using a 10-year time period and $48,000 in annual savings.
B. Redo your inital calculation one more time using $50,000 in annual savings for the first six years and $30,000 in annual savings for the next six years.
Explanation / Answer
The Maximum price that will be paid is present value of all the future saving
PMT = $40000
N=12 Years
Rate = 6%
PV= PMT(((1-(1+r)^-n)/r)
=40000*(((1-(1.06^-12)/0.06)
=$335353.76
A.
PMT = $48000
N=10 Years
Rate = 6%
PV= PMT(((1-(1+r)^-n)/r)
=48000*(((1-(1.06^-10)/0.06)
=$353284.18
B. We will calculate two seperate present value then add them
PMT = $0000
N=6 Years
Rate = 6%
PV= PMT(((1-(1+r)^-n)/r)
=50000*(((1-(1.06^-6)/0.06)
=$245866.22
for next 6 years:-
PMT = $30000
N=6 Years
Rate = 6%
PV= PMT(((1-(1+r)^-n)/r)/(1+r)^n
=30000*(((1-(1.06^-6)/0.06)*(1.06^6)
=$103995.59
Total= $103995.59+$245866.22= $349861.81
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.