Question

A company purchases a piece of equipment for $15,000. After nine years, the salvage value is $900. The annual insurance cost is 5% of the purchase price, the electricity cost is $600/yr, and the maintenance and replacement parts cost is $120/yr. The nominal annual interest rate is 9.6%, compounded monthly. Neglecting taxes, what is most nearly the present worth of the equipment if it is expected to earn the company $4500 per year?

1. $2300
2. $2800
3. $3200
4. $3500

Answer 1

	Annual Net cash Inflow
	Revenue	$       4,500
	Less;
	Insurance
	($15000*5%)	$           750
	Electrivity cost	$           600
	maintenance and replacement parts cost	$           120
	Net cash inflow	$       3,030
	r	0.096
	n	12
	= (1+0.096/12) ^12 - 1
	=10.03%
Year	Particulars	Cash Flow	PV Factor	PV Of Cash Flow
		a	b=1/1.103^a	c=a*b
0		-15000	1	$               -15,000
1	Annual Cash Inflow	3030	0.906618	$                   2,747
2	Annual Cash Inflow	3030	0.821957	$                   2,491
3	Annual Cash Inflow	3030	0.745201	$                   2,258
4	Annual Cash Inflow	3030	0.675613	$                   2,047
5	Annual Cash Inflow	3030	0.612523	$                   1,856
6	Annual Cash Inflow	3030	0.555325	$                   1,683
7	Annual Cash Inflow	3030	0.503467	$                   1,526
8	Annual Cash Inflow	3030	0.456453	$                   1,383
9	Annual Cash Inflow + salvage value	3930	0.413828	$                   1,626
	NPV			$                   2,616
	Most near = b.$2800