Homework Answers
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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