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It is estimated that a certain piece of equipment can save $22,000 per year in labor...

It is estimated that a certain piece of equipment can save $22,000 per year in labor and materials costs. The equipment has an expected life of five years no market value. If the company must earn a 7% annual return on such investments, how much could be justified now for the purchase of this piece of equipment?
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Answer #1
The question is based upon present value of annuity calculation.
Present value of annuity = Annuity x Present value of annuity of 1
= $ 22,000.00 x 4.100197
= $ 90,204.34
So,
Purchase price of equipment would be $ 90,204.34
Working:
Present value of annuity of 1 = (1-(1+i)^-n)/i Where.
= (1-(1+0.07)^-5)/0.07 i 7%
= 4.10019744 n 5
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