Chemical engineers at a Coleman Industries plant in the Midwest have determined

Question

Chemical engineers at a Coleman Industries plant in the Midwest have determined that a small amount of a newly available chemical additive will increase the water repellency of Coleman's tent fabric by 20%. The plant superintendent has arranged to purchase the additive through a 5-year price contract at $7000 per year, starting 1 year from now. He expects the annual increase by 12% per year thereafter the 8 years. Additionally, an initial investment $35,000 was made now 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.

Explanation / Answer

Total present worth = Investment + present worth
Calculating present worth Pg (zeroth year)
Pg = 7000 [(1 - [(1 + 0.12) /(1+0.15)]4 )/(0.15-0.12) ] + 7000[(1 - [(1 + 0.12) / (1+0.15)]9 )/(0.15-0.12)]*0.57
Pg = 7000*3.3445 + 7000*7.0572*0.57 = 23411.5 + 28158.228 = $ 51569.728
Total present worth = $ 35,000 + $ 51569.728 = $ 86,569.728

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