It is estimated that a certain piece of equipment can save $22,000 per year in l

Question

It is estimated that a certain piece of equipment can save $22,000 per year in labor and materials costs. The equipment has an expected life of five years no market value. If the company must earn a 7% annual return on such investments, how much could be justified now for the purchase of this piece of equipment? It is estimated that a certain piece of equipment can save $22,000 per year in labor and materials costs. The equipment has an expected life of five years no market value. If the company must earn a 7% annual return on such investments, how much could be justified now for the purchase of this piece of equipment?

Explanation / Answer

The question is based upon present value of annuity calculation. Present value of annuity = Annuity x Present value of annuity of 1 = $ 22,000.00 x 4.100197 = $ 90,204.34 So, Purchase price of equipment would be $ 90,204.34 Working: Present value of annuity of 1 = (1-(1+i)^-n)/i Where. = (1-(1+0.07)^-5)/0.07 i 7% = 4.10019744 n 5

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