Question

1. Use capital recovery analysis to evaluate an investment to recover an initial cost in 10-years. Initial purchase is $1,200,000. AOC is $25,000 and the salvage value is $650,000. Using i=10%.

2. Determine future worth with an annual investment of $50,000 which varies in interest. i=6% years 1-4 then 7% in years 5-6.

Answer 1

Assume that company needs Annual Revenue to be "X" such that invested capital gets recovered in 10 years

Present worth of Future Reveue streams =X(P/A,10%,10)+650000(P/F,10%,10)

Present Worth of Cost=Initial Purchase+PW of AOC=1200000+25000(P/A,10%,10)

1200000+25000(P/A,10%,10)=X(P/A,10%,10)+650000(P/F,10%,10)

1200000+25000(6.145)=X(6.145)+650000(0.3855)

1200000+25000(6.145)-650000(0.3855)=X(6.145)

1103050=X(6.145)

X=1103050/(6.145)=179503.67

hence We need to earn atleast $179503.67 to recover the initial cost in 10 years

Ans 2)

Future Worth of $50,000

FW=50000(F/A,6%,4)(F/P,7%,6)+50000(F/A,7%,6)=50000((4.64)(1.501)+7.654)=$730932