b) Carey Co. owns machinery that cost $60,000. It is to be
leased for 15
years with rent received at the end of each year. Carey wants a
return of 10%. Compute the amount of the annual rent.
c) Find the present value of an investment in equipment if it is
expected
to provide annual savings of $8,000 for 10 years and to have a
resale value of $20,000 at the end of that period. Assume an
interest rate of 9% and that savings are realized at year end.
| 1) | Assume annual rent be =C | ||||||||
| Present Value Of An Annuity | |||||||||
| = C*[1-(1+i)^-n]/i] | |||||||||
| Where, | |||||||||
| C= Cash Flow per period | |||||||||
| i = interest rate per period | |||||||||
| n=number of period | |||||||||
| $60000= C[ 1-(1+0.1)^-15 /0.1] | |||||||||
| 60000= C[ 1-(1.1)^-15 /0.1] | |||||||||
| 60000= C[ (0.7606) ] /0.1 | |||||||||
| C=7888.43 | |||||||||
| Annual Rent = 7888.43 | |||||||||
| 2) | Present value of an investment = Present value of annual cash inflow + present value of resale value | ||||||||
| = ($8000* PVAIF 10 years 9%) +($20000 * PV factor 10th year 9%) | |||||||||
| =$8000*6.417658 +$20000*0.422411 | |||||||||
| =$51341.26+8448.21 | |||||||||
| =$59789.48 | |||||||||
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