Question

The Doinion Freight Compny has invested 50000 USD in a new sorting machine that is expected to produce a return of 7500 USD per year for the next 10 years. At a 7 % annual interest rate, is this investment worthwhile?

Answer 1

Cost of new sorting machine = $50,000

Annual return from the machine = $7,500

Interest rate = 7%

Time period = 10 years

Calculate the present worth of the machine -

Present worth = - cost of new sorting machine + annual return (P/A, i, n)

Present worth = - 50,000 + 7,500(P/A, 7%, 10)

Present worth = - 50,000 + (7,500 * 7.024)

Present worth = - 50,000 + 52,680

Present worth = $2,680

The present worth of the investment is $2,680.

Based on present worth analysis, an investment with positive present worth is worthwhile.

The present worth of this investment is positive.

So,

This investment is worthwhile.