A project has an initial cost of 12 million. There are parts of the project that

Question

A project has an initial cost of 12 million. There are parts of the project that would required additional cost of 1.5 million every 3 years. If the interest rate is 9% per year compounded annually, A) what is the capitalizedequivalent of the annual cost of the project? B) What is the total present worth of the project? A machine cost $10,000 to purchase and $4,000 per year to operate. The machine has a 10-year life and no salvage value. Determine the EUAC of this machine at annual interest rates of 12% compounded annually.

Explanation / Answer

1)

a) Capitalized Equivalent = (1.5/3) * (1/0.09) = 5.55 million

b)Total Present Worth = 12 + 1.5 / (1+0.09)^3 +1.5/ (1.09^6).......inf

= 26.028 million

2) NPV = 10000 + 4000/1.12 +4000/1.12^2........till 10 years

NPV= 10000+22600.89 =32600.89

EUAC = NPV/0.1 = 2271674

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