A chemical company determined the need for a chemical additive that will improve

Question

A chemical company determined the need for a chemical additive that will improve their product by 20%. The company’s CEO arranged to purchase the additive through a 5-year contract at $7,000 per year, starting 1 year from now. He expect the annual price to increase by 12% per year starting in the sixth year and thereafter through year 13. Additionally an initial investment of$35,000 was made now to prepare a site suitable for the contractor to deliver the additive. Use i=15% per year to determine the equivalent total present worth for all these cash flows. Please use the appropriate formula(s) and not a chart. A chart does not show how you completed the work, only that you got an answer.

Explanation / Answer

Since, price is not given at all, only increase in price is given,so present value of cash inflow can not be calculated.

There are two Cash outflow for calculating the worth of the aditive First $ 35000 made immedietly to prepare site suitably and second annual contract payment of $ 7000 per year for 5 years Thus, the worth of additive is the present value of cash outflow Worth of additive = (35000*1)+(7000*cumulative discount factor for 5 years@15%) = (35000)+(7000*3.352) = $58,464 Cumulative discount factor calculation: Years a b a/b 1 1 1.15 0.870 2 1 1.3225 0.756 3 1 1.520875 0.658 4 1 1.749006 0.572 5 1 2.011357 0.497 Total 3.352

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.