A recently hired chief executive officer wants to reduce future production costs to improve the company’s...
A recently hired chief executive officer wants to reduce future production costs to improve the company’s earnings, thereby increasing the value of the company’s stock. The plan is to invest $98,000 now and $52,000 in each of the next 4 years to improve productivity. By how much must annual costs decrease in years 5 through 11 to recover the investment plus a return of 11% per year?
Homework Answers
Reduction in annual costs = A
i = 11%
Equating PV of all investments to PV of all cost savings (years 5 through 11)
98000 + 52000/(1 + 11%) + .... + 52000/(1 + 11%)4 = A/(1 + 11%)5 + .... + A/(1 + 11%)11
259327.2 = 3.104 x A
A = $ 83544.25
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A recently hired chief executive officer wants to reduce future
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