Eddie’s Precision Machine Shop is insured for $650,000. The present yearly insur
ID: 1175892 • Letter: E
Question
Eddie’s Precision Machine Shop is insured for $650,000. The present yearly insurance premium is $0.75 per $100 of coverage. A sprinkler system with an estimated life of 20 years and no salvage value can be installed for $35,000. Annual maintenance costs for the sprinkler system are $400. If the sprinkler system is installed, the system must be included in the shop’s value for insurance purposes, but the insurance premium will reduce to $0.40 per $100 of coverage. Eddie uses a MARR of 15%/year.
What is the future worth of this investment?
Explanation / Answer
Answer:
Annual premium without the sprinkler = 650000 * 0.75/100 = $4875
Annual premium with sprinkler =650000*0.4/100 = $2600
Thus, Annual savings from sprinkler = $4875 - $2600 = $2,275
Net benefits = Savings - annual costs = 2275 - 400 = $1875
Thus, Cashflows are -35000 at year 0 and $1875 from years 1 to 20.
The total worth of this investment = -35000 + Present value of $1875 per year for 20 years at 15% p.a
= -35000 + PV(15%,20,-1875) = -35000 + 11736.250 =-23263.75
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