You are considering investing RM65000 in new equipment. You estimate that the net cash flows will...

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Answer 1

Answer #1

PV of Cost

Particulars	Amount	Discounting factor	PV
Investment	65000	1	65000
Net salvage value	-5500	0.54703424	-3008.688347
Present value			61991.31165

Annual capital cost = 61991.31165/Annuity fator for 7 years of 9%= 61991.31165/5.032952835 = $12317.085752 i.e. $12317.09

PV of Cost savings

Year	Cost savings	Discounting factor	PV of Cost savings
1	12000	0.91743119	11009.17431
2	14500	0.84167999	12204.3599
3	17000	0.77218348	13127.11916
4	19500	0.70842521	13814.29162
5	22000	0.64993139	14298.4905
6	24500	0.59626733	14608.54951
7	27000	0.54703424	14769.92461
Total			93831.90961

Equivalent annual savings = PV of savings/Annuity factor = 93831.90961/5.032952835 = $18643.5106157 i.e. $18643.51

NPV of the Investment = 93831.90961 - 61991.31165 = $31840.59796 i.e $31840.60

Since NPV is positive this is a wise Investment = Y

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Answer 2

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