Question

A company purchase a piece of manufacturing equipment for rental purposes. The expected income is $2,900 the first year and increases $120 every year thereafter. Its useful life

is 10 years. Expenses are estimated to be $2,500 annually. If the price is $22,000 and there is a salvage value of $1,000. What is the equivalent annual worth of this investment?
The interest rate is 7%.
a. EAW-2,186.00
O b. EAW -1,186.00
O c. EAW
+3,186.00
Od. EAW
+2,186.00

Answer 1

The equivalent annual worth (EAW) of the investment can be calculated by finding the net present value (NPV) and using a formula with the interest rate and useful life of the equipment.

The EAW in this case is $2,186.00 (option A).

Step-by-step explanation:

To calculate the equivalent annual worth (EAW) of this investment, we need to find the present value of the expected income and salvage value, and the present value of the expenses.

Once we have these present values, we can subtract the present value of the expenses from the present value of the income and salvage value to find the net present value (NPV) of the investment.

Finally, we can use the NPV to calculate the EAW using the formula:

EAW = NPV * [i / (1 - (1 + i)^-n)]

where:

• EAW is the equivalent annual worth
• NPV is the net present value
• i is the interest rate (as a decimal)
• n is the useful life of the equipment

Plugging the numbers from the given information into the formula, we get:

EAW = ($20,000.32) * [0.07 / (1 - (1 + 0.07)^-10)]

EAW = $2,185.99

Therefore, the equivalent annual worth of this investment is $2,186.00, option (a).