Question

5) A company plans to invest $3 million in new manufacturing equipment that is expected to generate revenue of $380,000 and operating cost of $240,000 each month. The new equipment is estimated to have a $760,000 salvage value after 11 years. What is the future worth of this investment if the company's minimum attractive rate of return is 2% per year, compounded monthly.

book :-

Engineering Economy, 16th Edition (International edition), W. Sullivan, E. Wicks and C. Koelling; Pearson, 2015.

Answer 1

Monthly net benefit = Revenue - cost = 380,000 - 240,000 = 140,000

Monthly (nominal) interest rate = 2%/12 = 0.17%

Number of months = 11 x 12 = 132

FW ($) = - 3,000,000 x F/P(0.17%, 132) + 140,000 x F/A(0.17%, 132) + 760,000

= - 3,000,000 x 1.2513** + 140,000 x 147.8430** + 760,000

= - 3,753,900 + 20,698,020 + 760,000

= 17,704,120

**F/P(0.17%, 132) = (1.0017)132 = 1.2513

**F/A(0.17%, 132) = [(1.0017)132 - 1] / 0.0017 = (1.2513 - 1) / 0.0017 = 0.2513 / 0.0017 = 147.8430