Question

If your company performs an extensive upgrade on a CNC machine, you expect that there will be an equal annual addition in profits over the next 5 years. The upgrade will cost $50,000 today. To finance the upgrade, your company will withdraw the money from an investment paying 4% APR compounded annually. What equal annual profit must be achieved to recover this expense in 5 years?

Answer 1

Equal Annual Profit must be achieved to recover this expense in 5 years = $11,231.36

Equal Annual Profit = Cost of the Machine / [PVIFA 4%, 5 Years]

= $50,000 / 4.451822

= $11,231.36

If we earned an equal annual profit of $11,231.36 over the next 5 years, the total present of the annual profits would become $50,000

= [11,231.36 x 0.961538] + [11,231.36 x 0.924556] + [11,231.36 x 0.888996] + [11,231.36 x 0.854804] + [11,231.36 x 0.821927]

= $10,799.38 + 10,384.02 + 9,984.64 + 9,600.61 + 9,231.36

= $50,000