Question
In: Accounting
A lcompany is trying to upgrade its current equipements, which has an initial fee of $30,000....
A lcompany is trying to upgrade its current equipements, which has an initial fee of $30,000. The upgrade is expected to save them $5,000 in year 1 and increase by $500 each year thereafter. At an interest rate of 15% per year, what is the annual worth of the purchase over 7 years?
Solutions
Expert Solution
Calculation of present value of total savings over 7 years:
|
Year |
Savings per year |
Discounting factor of 15% |
Present Value |
|
1 |
5000 |
0.870 |
4350 |
|
2 |
5500 |
0.756 |
4158 |
|
3 |
6000 |
0.658 |
3948 |
|
4 |
6500 |
0.572 |
3718 |
|
5 |
7000 |
0.497 |
3479 |
|
6 |
7500 |
0.432 |
3240 |
|
7 |
8000 |
0.376 |
3008 |
|
Total |
25901 |
Initial fees for upgrading current equipments = $30000
Total present value of savings from current equipment = 25901
Net worth of purchase over 7 years =
Total present value of savings from current equipment - Initial fees for upgrading current equipments
= 25901 – 30000 = (4099)
Calculation of Annual worth of purchase over 7 years:
Let annual worth of purchase be X.
Net worth of purchase over 7 years = X*Present value annuity factor (15%, 7)
(4099) = X*4.1604
X = (4099)/ 4.1604 = (985.24)
The annual worth of purchase over 7 years is negative.
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