Question

An expenditure of $25,000 is made to modify a material-handling system in a small job shop. This modification will result in first-year savings of $2,500, a second-year savings of $4,200, and a savings of $5,500 per year thereafter. How many years must the system last if an 15% return on investment is required? The system is tailor made for this job shop and has no market (salvage) value at any time.

Answer 1

Investment(expenditure on modification) = $25000

@ of 15% return on investment net return = 25000 + 15% of 25000 = = 25000+ 3750 = $28750

Here in this case the savings done per year will be the return on investments therefore,

first years return = $2500

second years return = $4200

third years return = $5500

fourth years return =$5500

fifth years return =$5500

sixth years return =$5500

Net return in six years =

also we know that

ROI=(Current Value of Investment - Cost of Investment)/Cost of Investment​​

Curent value of investment=28700

Cost of investment = 25000

So ROI =

i.e. 14.8% ROI which is approximatey equal to 15% ROI

So it would take Six years for the Return of 15%

So net returns in six years $28700 are approximately equal to the 15% return on investment i.e.$28750

Thus it will take six years for the system to last if an 15% return on investment is required given that the system has no market value at any time.