Question

Turik Electronics manufactures microprocessorbased soft starters that use thyristors for controlled reduced voltage during starting and stopping. The company is planning a production-line expansion that will cost $1.3 million. If the company uses a minimum attractive rate of return of 15% per year, what is the equivalent annual cost in years 1 through 5 of the investment?

Answer 1

To calculate the equivalent annual cost of the investment in years 1 through 5, we need to use the concept of present value and the rate of return. Using a financial calculator or a spreadsheet program, we can calculate the present value of the $1.3 million investment for each year and add them up to get the equivalent annual cost of the investment.

Step-by-step explanation:

To calculate the equivalent annual cost of the investment in years 1 through 5, we need to use the concept of present value. Present value is the value today of a future cash flow or series of cash flows, discounted at a specific rate of return. In this case, the rate of return is 15% per year.

Using a financial calculator or a spreadsheet program, we can calculate the present value of the $1.3 million investment for each year from 1 to 5. Adding up these present values gives us the equivalent annual cost of the investment.

For example, the present value of the $1.3 million investment in year 1 would be $1,130,434.78. The present value of the investment in year 2 would be $981,132.08, and so on. Adding up these present values gives us the equivalent annual cost of the investment: $5,502,296.89.