Question

The operation cost of a company is 500,000 in Year 0. The campany expects an annual cost of 200,000 in Year 1, 100,000 from year 2 to 6, cost decreases by 4\% each year (7 to year 20) - Construct CFD - Calculate equivalent annual worth if all expenses occur within years 1−20;i=12% per year

Answer 1

To construct a Cash Flow Diagram (CFD) for the given information, represent each year as a separate time period and plot the cash inflows and outflows for each year. Next, calculate the present value of each cash flow using the formula PV = Cash Flow / (1 + interest rate)^time period. Finally, sum up the present values to find the equivalent annual worth.

Step-by-step explanation:

To construct a Cash Flow Diagram (CFD) for the given information, we can represent each year as a separate time period and plot the cash inflows and outflows for each year. Here is how the CFD would look like:

Year 0:

Cost = $500,000 (outflow)

Year 1:

Cost = $200,000 (outflow)

Years 2 to 6:

Cost = $100,000 (outflow)

Years 7 to 20:

Cost = Decreased by 4% each year (outflow)

To calculate the equivalent annual worth of all expenses occurring within years 1-20, we need to find the present value of each cash flow and then sum them up. Let's use the formula for Present Value (PV) to calculate the present value of each cash flow:

PV = Cash Flow / (1 + interest rate)time period

Given an interest rate of 12%, we can calculate the present value of each cash flow and sum them up to find the equivalent annual worth.