Cisco, Inc., has a proposal from the Engineering Planning Division to invest Cis

Question

Cisco, Inc., has a proposal from the Engineering Planning Division to invest Cisco retained earnings in the design, testing, and development of the next generation of smart grids useful in the Internet of Things (IoT) environment. The initial investment projection is $4,900,000 in year 0, $2,000,000 in year 7, and $85,247 in years 11 and beyond. At i = 8% per year, calculate the infinite-life equivalent annual cost in years 0 through infinity of the proposal.

The infinite-life equivalent annual cost is determined to be $??

Explanation / Answer

i = 8%

PV = 4900000 + 2000000/1.087 + 1/1.0810 x (85247/1.08 + 85247/1.082 + ....)

PV = $ 6560553.98

Annual cost = A

A/1.08 + A/1.082 + ....... = 6560553.98(equating the PV of annual costs = PV calculated earlier)

(sum of infinite GP = A/interest rate)

A = $ 524844.32

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