Homework Answers
As per the information provided in the question to reduce the future cost of production the CEO has taken the investment decision
Initial investment (I) =$96000
Annual investment (A) from year 1 to year 5 = $56000
Rate of return = 12% per year
Present worth of the cost = $96000 + $56000(P/A,12%,5) = $96000 + $56000(3.60478)
Present worth of the cost = $96000 + $201867.68 =$297867.68
The future worth of the cost after 14th year with 12% return will be = $297867.68(F/P,12%,14) = $297867.68(4.88711) = $1455712.12
Or the value of investment with 12% return after 14 year = $1455712.12
As per the question how much annual cost must decrease from year 6 to year 14 (14-6=9 year) to recover the investment plus 12% returns per year
So annual decrease in cost = $1455712.12(A/F,12%,9) = $1455712.12(0.06768) = $98522.60
The required annual cost to decrease from year 6 to year 14 is = $98522.60
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