Question

Q4) A chemical company determined the need for a chemical additive that will improve their product by 20%. The company’s CEO arranged to purchase the additive through a 5-year contract at $7,000 per year, starting 1 year from now. He expect the annual price to increase by 12% per year starting in the sixth year and thereafter through year 13. Additionally an initial investment of$35,000 was made now to prepare a site suitable for the contractor to deliver the additive. Use i=15% per year to determine the equivalent total present worth for all these cash flows.

Answer 1

Equivalent total Present worth (PW) of cost of the additive is computed as follows.

FV factor in year N = (1.15)^-N

Year	Cost ($)	PV Factor @15%	Discounted Cost ($)
	(A)	(B)	(A) x (B)
0	35,000	1.0000	35,000
1	7,000	0.8696	6,087
2	7,000	0.7561	5,293
3	7,000	0.6575	4,603
4	7,000	0.5718	4,002
5	7,000	0.4972	3,480
6	7,840	0.4323	3,389
7	8,781	0.3759	3,301
8	9,834	0.3269	3,215
9	11,015	0.2843	3,131
10	12,336	0.2472	3,049
11	13,817	0.2149	2,970
12	15,475	0.1869	2,892
13	17,332	0.1625	2,817
		PW ($) =	83,230