Question

A service cost project of a computer-controlled rolling mill is expected to have an annual operating cost of $75,000 per year. Its economic life is estimated to be years with a $10,000 salvage value. At an interest rate of 18 per year, the AW of the project is $169,500, what is the expected installation cost of the project? (Hound to One Decimal) Answer..

Answer 1

Net present worth x Capital recovery factor Annual worth

At an interest rate of 18% and with an economic life of 5 years, the capital recovery factor is calculated using the following equation : -

i(1+ Capital recovery factor (1 1

0.18 x (10.18)5 (1 0.18) 5 1 Capital recovery factor =

Capital recovery factor = 0.3198

Annual worth Net present worth Capital recovery factor

$169500 Net present worth 0.3198

Net present worth = $ 530,018.76

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The net present worth, initial investment , annual operating costs and salvage value are related as follows :-

Annual operating cost Annual operating cost Net present worth = Installation cost + (1+0.18) (1+0.18) Annual operating cost Annual operating cost (1+0.18) Annual operating cost Salvage value (1+0.18) (1+0.18)5 (1+0.18)4

$75,000 $75,000 $75,000 + (1+0.18) $530,018.76 Installation cost + (1+0.18) (1+0.18)2 $75,000 $75,000 $10.000 (1+0.18)4 (1+0.18)5 (1+0.18)5

Installation cost = $ 299,852.0

Answer = $ 299852.0