Time value of money: The final tally is in: This year’s operating costs were dow

Question

Time value of money: The final tally is in: This year’s operating costs were down $100,000,a decrease directly attributable to the $520,000 investment in the automated materials handling system put in place at the beginning of the year.

a. If this level of annual savings continues for five more years, resulting in six total years of annual savings, what compounded annual rate of return will that represent?

b. If these annual savings continue for nine more years, for a total of 15 years of annual savings, what compounded annual rate of return will that represent?

Explanation / Answer

Amount invested = 520000

Total Savings = 100000 x 6 = 600000

Sum of the above = 1120000

Annualised return = [(investment+ savings)/sinvestment] ^ (1/number of years) - 1

Case 1 : For 6 years return - that is (1120000/520000)^(1/6)-1 = 13.65%

Case 2 : For 15 years returns =+(2020000/520000)^(1/15)-1 = 9.47%

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