Question

You are faced with making a decision on a large capital investment proposal. The capital investment amount is $640,000. The estimated annual revenue at the end of each year in the eight-year study period is $180,000. The estimated annual year-end expenses are $42,000 starting in year 1. These expenses begin decreasing by $4,000 per year at EOY 4 and continue decreasing through the EOY 8. Assuming a $20,000 market value at the end of year right and a MARR= 12% per year,

1. What is the present worth of this proposal?

2. What is your conclusion about the acceptability of this proposal?

A tattoo shop has the following revenue stream over a 5-year period: $9,000, $17,000, $19,000, $11,000 and $22,000.

3. What is the EUAW of this business (assume i = 12%).

Answer 1

1. Present Worth =

=−$640,000 + $180,000 (P/A,12%,8)−$42,000 (P/A,12%,8)+ $4,000 (P/G, 12%,6)(P/F,12%,2) + $20,000(P/F,12%,8)

=−$640,000 + $180,000 (4.9676)−$42,000 (4.9676)+ $4,000 (8.930)(0.7972) + $20,000 (0.4039)

= $82,082.78

2. Based on PW ( Positive ), the proposal is acceptable.

3.

PV = Cash flow at time/(1+r)^t

Total PV=Sum(PV of all cash flows)

EUAW

=Total PV * rate/(1-1/(1+rate)^t)
=(9000/1.12+17000/1.12^2+19000/1.12^3+11000/1.12^4+22000/1.12^5) * 12%/(1-1/1.12^5)

=15142.67