Question

Eddie’s Precision Machine Shop is insured for $700,000. The present yearly insurance premium is $1.00 per $100 of coverage. A sprinkler system with an estimated life of 20 years and no salvage value can be installed for $25,000. Annual maintenance costs for the sprinkler system are $3,300. If the sprinkler system is installed, the system must be included in the shop’s value for insurance purposes, but the insurance premium will reduce to $0.40 per $100 of coverage. Eddie uses a MARR of 15%/year. Click here to access the TVM Factor Table Calculator Incorrect answer. Your answer is incorrect. Try again. What is the annual worth of this investment? $

Answer 1

Current annual insurance premium = $1 x ($700,000 / $100) = $7,000

New annual insurance premium (after sprinkler system) = $0.4 x ($700,000 / $100) = $2,800

Annual savings = $7,000 - $2,800 = $4,200

Net annual savings ($) = Annual savings - Annual maintenance cost = 4,200 - 3,300 = 900

Annual worth ($) = -25,000 x A/P(15%, 20) + 900 = -25,000 x 0.1598** + 900 = -3,995 + 900 = -3,095

**From A/P Factor table