Question

A recently hired chief executive officer wants to reduce future production costs to improve the company’s earnings, thereby increasing the value of the company’s stock. The plan is to invest $82,000 now and $52,000 in each of the next 4 years to improve productivity. By how much must annual costs decrease in years 5 through 12 to recover the investment plus a return of 11% per year? The annual cost decreases by $

Answer 1

Let Annual cost saving be x
Year	Cashflows	PVF	Present Value
0	-82000	1	-82000
1	-52000	0.900901	-46846.8
2	-52000	0.811622	-42204.4
3	-52000	0.731191	-38022
4	-52000	0.658731	-34254
5	x	0.593451	0.5935x
6	x	0.534641	0.5346x
7	x	0.481658	0.4817x
8	x	0.433926	0.4339x
9	x	0.390925	0.3909x
10	x	0.352184	0.3522x
11	x	0.317283	0.3173x
12	x	0.285841	0.2858x
Net Present value			3.3899x -243327
Net Present value = 0
3.3899x - 243327 = 0
x=   71780
Annual cost must decrease by $ 71780