Consider the replacement situation indicated in the talbe below. If estimates be

Question

Consider the replacement situation indicated in the talbe below. If estimates beyond 10 years are unreliable and if the MARR is 12%, decide whether if it is expedient to replace the current equipment salvage value original annual Now End of life cost cost service life Current $8,000 $1,000 $17,000 $3,600 10 more years Replacement $6,000 $19,000 $800 20 years You are considering a project with the following financial data: Required initial investment at n = 0: $50M Project life: 10 years Estimated annual revenue: $X (unknown) Estimated annual operating cost: $15M Required minimum return 20% per year Salvage value of the project: 15% of the initial investment What is the minimum annual revenue (in $M) must be generated to make the project worthwile? X = 26.64 M X = 32.47 M X = 28.38 M X = 35.22 M

Explanation / Answer

Q 2

NPW should be 0

Hence X/1.2+X/1.2^2 +X/1.2^3......X/1.2^10 +0.15*50/1.2^10 - (15/1.2+15/1.2^2 +15/1.2^3......15/1.2^10) =50 million

Solving you will get 26.64 million

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