You may write on the back of the page 1-8.5 x 11\" sheet of notes allowed, close

Question

You may write on the back of the page 1-8.5 x 11" sheet of notes allowed, closed book and other notes 1 - 8.5 x 11" sheet Tax / MACRS sheet Time: 110 minutes Total points: 100 Round off to the nearest dollar Only legible writing will be graded Honor System strictly enforced A company invests in a special HVAC system worth $175,000 at the beginning of the year. They expect the following cash flows for the next 5 years related to the HVAC investment $50,000 in electricity per year $5,000 for maintenance per year $10,000 in operations cost per year, expected to rise 10% each year after year 1. They are less certain about revenue. Best case they will make $600,000. Worst case $125,000. Most likely, they will earn $400,000. The company's MAR-1090 5

Explanation / Answer

1.

Expected revenue = (1/3)*(600000 + 125000 + 400000)

Expected revenue = $375000

2.

R = 10%

Time = 5 years

Present value of all cost = initial investment + present value of the electricity cost + present value of the maintenance cost + present value of operations cost

Present value of all cost = 175000 + 50000*(1-1/1.1^5)/.1 + 5000*(1-1/1.1^5)/.1 + (10000/1.1 + 10000*1.1/1.1^2 + 10000*1.1^2/1.1^3 + 10000*1.1^3/1.1^4 + 10000*1.1^4/1.1^5)

Present value of all cost = $428947.82

So, the company should set aside $428947.82 in the account to meet all the estimated cost.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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