Question

Company 1 are planning to increase the value of the company’s stock by reducing future production costs. The plan is to invest $20,000 now and $20,000 in each of the next 2 years to improve productivity. By how much must annual costs decrease in years 3 through 9 to recover the investment plus a return of 15% per year?

Answer 1

The annual costs must decrease by $63,000 from year 3 to year 9 to recover the investment plus a return of 15% per year.

Step-by-step explanation:

To recover the investment plus a return of 15% per year, the annual costs must decrease by an amount equal to the investment plus the return.

Given that the investment is $20,000 now and $20,000 in each of the next 2 years, the total investment is $60,000. At a return rate of 15% per year, the return in year 3 will be $20,000 x 15% = $3,000. From year 3 to year 9, the annual costs must decrease by $60,000 + $3,000 = $63,000.