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A company with a MARR=10% is considering investing in a $25,000 piece of equipment. The resultant...

A company with a MARR=10% is considering investing in a $25,000 piece of equipment. The resultant income from this investment will be $10,000 the first year, decreasing by $500 each year. The equipment has a 12 year life and no salvage value. The net FUTURE worth of this investment is closest to:

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Answer #1

As per the information provided in the question

The initial investment on the equipment (I) = -$25000

The resultant income from the investment in year one (A1) = $10000

Decrease in the income each year (G) = 500

Total number of periods (N) = 12 years

Salvage value = $0

MARR (i) = 10%

The negative sign indicates cash outflow and positive sign indicates cash inflow

Future worth of the investment (NFW) =?

Future worth of initial investment (F1) = -$25000(F/P,10%,12)=-$25000(3.138428)= -$78460.7

Equivalent Annual income (A) = A1 – G(A/G,i,N) = $10000 - $500(A/G,10%,12)

A = $10000 - $500(4.3884) =$10000-$2194.2 =$7805.8

Future worth of the annual income (F2) = $7805.8(F/A,10%,12)= $7805.8(21.3843)= $166921.5689

NFW= F1+F2 = -$78460.7 + $166921.5689=$88460.8689   or   Approx $88460.87

The Future worth of the investment (NFW) is close to =$88460.87

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