EmKay Fertilizer Company wishes to install a brand new equipment that costs $100

Question

EmKay Fertilizer Company wishes to install a brand new equipment that costs $100,000 and has a life of 4 years. At the end of the 4-year period, it is estimated that it will cost the company $10,000 to dispose of the equipment. Operating and maintenance costs are estimated to be $7,500 for the first year. Thereafter, these O&M costs are expected to increase by $1,000 over the previous year's costs. If the annual interest rate is 15% per year compounded annually, determine the present worth of the costs for this venture.

Explanation / Answer

Working note:

(1) Cost in terminal year (year 4) will increase by the amount of disposal cost ($10,000).

(2) Present worth (PW) is the sum of all discounted costs, which are discounted at 15%.

Year Cash flow ($) PVIF @15% Discounted cash flow ($) (A) (B) (A) x (B) 0 1,00,000 1.0000 1,00,000.00 1 7,500 0.8696 6,521.74 2 8,500 0.7561 6,427.22 3 9,500 0.6575 6,246.40 4 20,500 0.5718 11,720.94 PW ($) = 1,30,916.31

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