Question

Engineering Economics:

How much money could a maker of superconducting magnetic energy storage systems afford to spend now on new equipment that has an initial cost of $50,000, and operation costs of $1000 per year beginning 5 years from now if the company’s rate of return is 12% per year?

Answer 1

Answer is as follows:

Initial Cost = $50,000

Operating Costs = $1000 per year at the beginning of the year.

Rate of Return = 12%,

Year Amount $ PVF@12% PV of Cash Outflows $

0 50000 1 50000

0 1000 1 1000

1    1000 0.8929 892.9

2 1000 0.7972 797.2

3 1000 0.7118 711.8

4 1000 0.6355 635.5

Present Value of Cash Outflows    54037.4

Above for calculation of Present Value,Payment at the beginning of year 2 = Payment made at the end of year 1 is taken.