The owner of a business is considering investing $55,000 in new equipment. He estimates that the net cash flows will be $5,000 during the first year and will increase by $2,500 per year each year thereafter. The equipment is estimated to have a 10-year service life and a net salvage value at the end of this time of $6,000. The firm's interest rate is 12%.(a) Determine the annual capital cost (ownership cost) for the equipment.(b) Determine the equivalent annual savings (revenues).(c) Determine whether this investment is wise.
The owner of a business is considering investing $55,000 in new equipment. He estimates that the net cash flows will be $5,000 during the first year and will increase by $2,500 per year each year thereafter. The equipment is estimated to have a 10-year service life and a net salvage value at the end of this time of $6,000. The firm's interest rate is 12%.(a) Determine the annual capital cost (ownership cost) for the equipment.(b) Determine the equivalent annual savings (revenues).(c) Determine whether this investment is wise.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
The owner of a business is considering investing $55,000 in new equipment. He estimates that the net cash flows will be $5,000 during the first year and will increase by $2,500 per year each year thereafter. The equipment is estimated to have a 10-year service life and a net salvage value at the end of this time of $6,000. The firm's interest rate is 12%.
(a) Determine the annual capital cost (ownership cost) for the equipment.
(b) Determine the equivalent annual savings (revenues).
(c) Determine whether this investment is wise.
Expert Solution
Trending now
This is a popular solution!
Step by step
Solved in 9 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education