Question

Cisco, Inc., has a proposal from the Engineering Planning Division to invest Cisco retained earnings in the design, testing, and development of the next generation of smart grids useful in the Internet of Things (IoT) environment. The initial investment projection is $4,900,000 in year 0, $2,400,000 in year 7, and $116,480 in years 11 and beyond. At i = 10% per year, calculate the infinite-life equivalent annual cost in years 0 through infinity of the proposal.

Answer 1

Given Data:

Investment in Year 0 = P1 = $4900000

Investment in Year 7 = P7 = $2400000

Investment in Year 11 = P11 = $116480

Interest rate = I = 10% per year

Tenure = N = ∞

EAC for infinite time period = A = ?

In order to estimate the equivalent annual cost we need to find the present worth of the investment scattered in the time line on 0^th, 7^th and 11^th year respectively and then estimate the EAC for infinite time period represented by A.

A = [4900000 + 2400000(P/F,10%,7) + 116480(P/F,10%,11)](A/P,10%,∞)

We have (A/P,10%,∞) = I and using DCIF Tables

A = (4900000 + 2400000*(0.5132) + 116480(0.3505))*(0.10)

A = $617250.6

The Infinite life equivalent annual cost = $617250.6