Question

USE EXCEL TO SOLVE: A company is considering an upgrade of production equipment to reduce costs over the next 5 years. The company can invest $80,000 now, 1 year from now, or 2 years from now. Depending on when the investment is made, the savings will vary. The saving estimates are $26,000, $31,000, or $37,000 per year if the investment is made now, 1 year from now, or 2 years from now, respectively. The company will only invest if the ROR is at least 20% per year. Using a future worth analysis, determine if the timing of the investment will affect the return requirement and, if so, when the investment should be made. Set up the spreadsheet functions necessary to perform the analysis and answer the following questions. Upload your spreadsheet in the location provided below. (a) Investment Timing (Enter Now / Year 1 / Year 2 / Never): (b) Estimated Future Worth (dollars): $

Answer 1

Life time of the equipment = 5 Years

First we need to calculate the present value of the investments for different time period.

Future worth = Present value ( F/P, r,n)

Time	Investment	Present value factor ( P/F)	Present value	Saving Estimates	Year of Saving received	Present Value factor (P/A) For 5 years	Present value	Net present value	Future value factor (F/P)	Future Worth
Now	$80,000	1	$80,000	$26,000	1st Year to 5th	2.991	$77,766	($2,234)	1	($2,234)
Year1	$80,000	0.833	$66,640	$31,000	2nd year to 6th	2.492	$77,252	$10,612	1.2	$12,734
Year2	$80,000	0.694	$55,520	$37,000	3 rd year to 7th	2.077	$76,849	$21,329	1.44	$30,714

Decision:- Company should invest in year 3 since it has maximum future worth in that year.