Consider an investment in a project having a first cost of $300,000, operating a
ID: 2737623 • Letter: C
Question
Consider an investment in a project having a first cost of $300,000, operating and maintenance costs of $45,000 per year, a profit of $65,000 per year, and an estimated disposal cost of $50,000 (toxic chemicals) at the end of 12 years.
Assuming an interest rate of 6%, what is the present equivalent cost of the investment?
Assuming an interest rate of 6%, what is the equivalent annual cost of the investment?
Assuming an interest rate of 2%, what is the equivalent annual cost of the the equivalent annual cost of the investment?
Explanation / Answer
Cashflow during operational years = $65,000 - $45,000
= $20,000
(b) NPV = - $300,000 + $20,000 * [1 - (1 + 6%)-12] / 6% - $50,000 / (1 + 6%)12
= - $157,171.59
Present equivalent cost of investment = - $157,171.59 / [1 - (1 + 6%)-12] / 6%
= - $18,746.96
(c) NPV = - $300,000 + $20,000 * [1 - (1 + 2%)-12] / 2% - $50,000 / (1 + 2%)12
= - $127,917.83
Present equivalent cost of investment = - $127,917.83 / [1 - (1 + 2%)-12] / 2%
= - $12,095.86