NormalNo Spac... Heading 1 Heading a Paragraph Styles Q. A consulting engineer w

Question

NormalNo Spac... Heading 1 Heading a Paragraph Styles Q. A consulting engineer working on an economic analysis of a countermeasure found that the installation cos was estimated to be S 220,000 and the annual savings in crash reduction due the proposed countermeasure was $12,000 and the annual maintenance cost of keeping the countermeasure in effective use was estimated to be S2,500. The economic life of the countermeasure is estimated to be 20 years. Compute the discount rate (rate of return) that will break even, i.e.NPV-0 in the 20 years economic life of the countermeasure

Explanation / Answer

For 20 years, the total savings are 12000*20 = 240000 and maintainance cost = 2500*20 = 50000.

THus total value for 20 years = 190000.

For NPV to be zero, 190000(1+r)^20 = 220000 => r = 0.00736 or 0.736%

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