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 $5,900,000 in year 0, $2,900,000 in year 5, and $102,115 in years 11 and beyond. At i = 15% 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

Annual Worth =PV(i(1+i)^n/((1+i)^n-1)

Dividing numerator and Denominator with (1+i)^n we get

AW=PW(i/(1-(1/1+i)^n)

Now as n tends to infinity (1/1+i)^n tends to zero

AW=PW(i)

We need to find PW=5900000+2900000/(1.15)^5+102115(1/1.15^11+....till infinity)=5900000+(2900000/1.15^5)+102115/(1-(1/1.15))

PW=8,124,694

Hence AW=8,124,694*0.15=$1,218,704

Therefore infinite life equivalent annual cost is =$1,218,704

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