Question

There is a project for a laser printing equipment with an investment of $ 680,000 with operating costs of $ 78,200 and estimated income of $ 180,300 for 10 years. In the end, it can be sold for $ 250,000. With a TREMA of 11% per annum, what do you recommend? Use the annual value method.

VA $ 1,585.39, yes it is good investment project
VA $ 689,336.71, I recommend not investing
VA $ 117,050.36, yes it is good project to invest
VA $ 933.67, I recommend investing

Answer 1

Initial investment = $680,000

Annual operating cost = $78,200

Annual income = $180,300

Salvage value = $250,000

Interest rate = 11%

Time period = 10 years

Calculate the annual value -

Annual value = -$680,000 (A/P, 11%, 10) - $78,200 + $180,300 + $250,000 (A/F, 11%, 10)

Annual value = (-$680,000 * 0.16980) - $78,200 + $180,300 + ($250,000 8 0.05980)

Annual value = -$115,464 - $78,200 + $180,300 + $14,950

Annual value = $1,586

The annual value is $1,586.

When annual value is positive then investment is a good investment.

So,

The correct answer is the VA $1,585.39, Yes it is good investment project.

Hence, the correct answer is the option (1).