Question

A cable company OSN is considering installing new technology to increase sales and save on satellite time. The system is expected to have a 10-year service life and produce the following savings and expenditures:

Investment
Now (building)
$500,000
Year 1 (equipment and facilities)
2,200,000
Year 2 (training and test run)
200,000
Annual Savings (Year 3 to Year 10)
5,000,000
Annual Expenses
1,500,000
Annual Taxes
800,000
Service Life
10 Years
Salvage Value
$1,500,000
If the firm’s MARR is 15%, what is Net Present worth of this project?
o $2,857,859
o $4,487,500
o $3,228,636
o $3,932,275

Answer 1

Given initial investment = $ 500,000

Year 1, expense = $ 2,200,000

Year 2 expense = $ 200,000

Annual saving = $ 5,000,000 ( year 3 to 10)

Annual expense = $ 1,500,000

Annual tax = $ 800,000

Salvage value = $ 1,500,000

Rate = 15%

The net present value can be determined using the following formula

NPV = $ 3,228,636

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