A company expects the material cost of a certain manufacturing operation to be $

Question

A company expects the material cost of a certain manufacturing operation to be $20,000 per year. At an interest rate of 8% per year, the present worth of this cost over a five year project period is closest to: a. $29,386 b. $56,220 c. $79,854 d. $117,332 4. A piece of machinery has a first cost of $31,000 with a monthly operating cost of $10,000. If the company wants to recover its investment in five years at an interest rate of 1% per month, the monthly income must be closest to: a. $5,498 b. $6,386 c. $8,295 d. $10,688

Explanation / Answer

3. Since the projection period is over 5 years, the formula for present value of the discounting cash flow is given as,

PV = $20,000*[(1/1+r) + (1/1+r)2 + (1/1+r)3 + (1/1+r)4 + (1/1+r)5].

PV = $20,000*[(0.9259) + (0.8574) + (0.7938) + (0.7351) + (0.6805)].

PV = $20,000*3.9927

PV = $79854.

Hence option C is correct.

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