A building development has the following financial costs, based on an economic l

Question

A building development has the following financial costs, based on an economic lifetime of 25 years:

                 Initial Investment = $8,000,000

                 Annual maintenance cost = $120,000

                 Resale value at 25 years = $5,000,000

(1) Using 4% discount rate, compute:

      (a) Present discounted cost of the project

      (b) Equivalent annualized cost of the project

      (c) Future discounted cost at year 25

(2) What financing situation would each of these different costs would be advantageous over the other?

Explanation / Answer

1)discounted cost=8,000,000+120,000[1/1.04+1/1.04^2+...1/1.04^25]

=8,000,000+120,000[(1/1.04)-(1/1.04^25)*(1/1.04)/(1-1/1.04)]=9874640

2)let annual cost be A

THEN,

A/1.04+A/1.04^2+...A/1.04^25=9874640

A[(1/1.04)-(1/1.04^25)*(1/1.04)/(1-1/1.04)]=9874640

A=632,098.32

3)FV=9874640 *1.04^25=26324174.07

NOTE:RESALE VALUE DOESNOT COME UNDER COSTS,PV=PRESENT VALUE,FV=FUTURE VALUE

SUM OF G.P=(a-lr)/(1-r)

a=first term

l=last term

r=ratio

2)IF RESALE VALUE'S PV IS GREATER THAN PV OF ALL COSTS,THEN IT WOULD BE BENEFICCIAL

OR IF FV OF COSTS IS LESS THAN THE GIVEN RESALE VALUE,THEN IT WOULD BE BENEFICIAL,BUT IT IS NOT THE CASE AS FV IS 26324174.07

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.