Question

A firm is about to begin pilot plant operation on a process it has developed. One item of optional equipment that could be obtained is a heat exchanger unit. The company finds that a unit now available for $30,000 could be used in other company operations. It is estimated that the heat exchanger unit will be worth $35,000 at the end of 8 years. This seemingly high salvage value is due primarily to the fact that the $30,000 purchase price is really a rare bargain. If the firm believes 15% is an appropriate rate of return, what annual benefit is needed to justify the purchase of the heat exchanger unit

Answer 1

Answer:

$4,135.75

Explanation:

Let x be the annual benefit.

Year     Cash flow      D.F. at 15%     Cumulative

0            -30000                        

1                X               0.869565217   0.869565217

2               X               0.756143667    1.625708885

3               X               0.657516232    2.283225117

4               X               0.571753246     2.854978363

5               X               0.497176735     3.352155098

6               X               0.432327596    3.784482694

7               X                0.37593704      4.160419734

8               X                0.326901774    4.487321508

8           35000           0.326901774

Present value of outflow = Present value of Inflow

By equating we get, 30000 = (35000 * 0.326902) + 4.487322x

30000 = 11441.57 + 4.487322x

4.487322x = 30000 - 11441.57

4.487322x = 18558.43

x = 18558.43/4.487322

x = 4135.747334378946

x = 4135.75

So, annual benefit is $4,135.75