Question 3 (6 points) A company is considering an external long-term contract of

Question

Question 3 (6 points) A company is considering an external long-term contract offer that improve the energy years with continuing payments thereafter. The proposed schedule is $230,000 now, $120,000 six years from now, $30,000 every four years, and an annual amount of $8,000 beginning 15 years from now. Project save $31,000 in energy costs annually for entire of its unlimited life. Using the capitalized cost method at 5% per year, the present worth of Benefits minus Costs is closest to: O a. 60,000 b. 20,000 Oc. 80,000 d. 140,000

Explanation / Answer

Present worth of benefits:

Present worth of annuity= annual cash flow/interest rate

present worth of annual savings= 31000/5%= 620000

Present worth of costs:

Today cost= 230000

present worth of 120000 from now= 120000 *present value factor (5%, 6years)= 120000* 0.746= 89520

present worth of 30000 every four years, converted to annual outflow of (30000/4) 7500 annually= 7500/5%= 150000

Present worth of 8000 beginning 15 years from now:

Present worth at the beginning of 15 years of 8000 annual outflow= 8000/5%= 160000

Present value of 160000 = 160000 * present value factor(5%, 15 years)= 160000*0.481= 76960

Total present worth of outflows= 230000+89520+150000+76960= 546480

Present worth of benefits minus costs= 620000 - 546480= 73520

it is close to 80000

option c. is correct

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