1- How much money do you need to invest annually for 5 years to start withdrawin

Question

1- How much money do you need to invest annually for 5 years to start withdrawing $50K a year forthe indefinite time? Assume 8% interest rate for your analysis. 50,000 A(3.1127) 2-An investment in a new molding equipment requires $150K investment now and is expecting an annual cost of $25K in the first 5 years and a salvage value of $20K after 5 years. Use AW procedure to determine how much revenue the restaurant must generate annually to get to a)-an annual breakeven point, b)-get 20% annual profit. Assume 8%interest rate for your analysis. 20 k 5

Explanation / Answer

First we need to calculate the PV of perpetuity that you will receive for infinite period of time.

Perpetuity is equal amount of cash flow that is received in future for infinite period.

If periodic payment is P, and interest rate is r then present value of perpetuity is

PV of perpetuity= P/ r

Let's put all the values in the formula

PV of perpetuity= 50000/ 0.08

= 625000

PV value of perpetuity is 625000

That amount (625000) is the FV of annuity that you need to deposit to get the perpetuity.

We need to find Annual deposit

FV of annuity = Periodic deposit * FV factor of annuity @ 8%, n = 5 years

625000 = Annual deposit * 5.86660

Annual deposit = 625000/5.86660

                              = 106535.3

You need 6to deposit $106535.3 per year for 5 years, to get the annual cash inflow of 50000

                                                               

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