Question

Question 4 25 points Save Ans A company purchases a piece of manufacturing equipment for rental purposes. The expected income is $3600 the first year and increase $100 every year thereafter. Its useful life is 8 years. Expenses are estimated to be $600 annually. If the purchase price is $24,000 and there is a salvage value of $4,500. The prospective rate of return of these investment alternative is 15%. . EAW-$1,843 c EAW-$1,843 d. EAW- $1,743 &Click Submit to complete this assessment. Cuestian

Answer 1

Initial Investment = $24,000

Annual Expenses = $600

Salvage Value = $4,500

Expected income in the 1^st year = $3,600, increases by $100 every year

A1= $3,600, G = $100

Life = 8 years

What is the EAW if interest rate is 15%?

First convert the gradient income series into uniform series.

A = A1 + G (A/G, I, N)

A = $3,600 + 100 (A/G, 15%, 8)

A = $3,600 + 100 (2.7813) = 3,878

Net Annual Cash flow = Annual Inflow – Annual Outflow

Net Annual Cash flow = $3,878 – $600 = $3,278

EAW = -$24,000 (A/P, 15%, 8) + $3,278 + $4,500 (A/F, 15%, 8)

EAW = -$24,000 (0.2229) + $3,278 + $4,500 (0.0729)

EAW = -$1,743

ANSWER – B. -$1,743