2. A Firm is about to begin pilot plant operation, and it could add an optional

Question

2. A Firm is about to begin pilot plant operation, and it could add an optional heat exchanger unit. A unit is now available for $ 30,000, and it is estimated that heat exchanger unit will be worth $35,000 after 8 y other company operations. This high salvage value is because the $30,000 purchase price is really a rare b 1f10% is an a 25 points ears for use in ppropriate rate of return, what annual benefit is needed to justify buying the heat exchanger unit? Cash flow $30,000 +A=? +535,000 Year 1-8

Explanation / Answer

Purchase of the heating unit is justified when Purchase price = Present worth of future benefits

$30,000 = A x PVIFA(10%, 8) + $35,000 x PVIF(10%, 8)

$30,000 = A x 5.3349** + $35,000 x 0.4665**

$30,000 = A x 5.3349 + $16,327.5

A x 5.3349 = $13,672.5

A = $2,562.84

**From PVIFA & PVIF Factor tables

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