Transcontinental Pipelines is considering a technical process that is expected to reduce annual maintenance costs by...
Transcontinental Pipelines is considering a technical process that is expected to reduce annual maintenance costs by $76,000 What is the maximum amount of money that could be invested in the process to be economically feasible if interest is 7.6% compounded semi-annually?
Homework Answers
Maximum amount of money that could be invested = reduction in annual maintenance costs / effective annual rate
(This is the formula for the present value of a perpetuity. The perpetuity in this case is the reduction in annual maintenance cost)
Effective annual rate = (1 + (annual interest rate / 2))2 - 1
Effective annual rate = (1 + (7.6% / 2))2 - 1
Effective annual rate = 7.74%
Maximum amount of money that could be invested = $76,000 / 7.74%
Maximum amount of money that could be invested = $981,354.27
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