Question #241548

You are working with the manager of an irrigation facility who is interested in installing

a more efficient pumping system. The proposed system costs $15,000 and you project

that it will reduce the annual utility costs by $2,000. After five years, you expect to

upgrade the system for $4,000. This upgrade is expected to further reduce utility costs by

$1,000 annually. The annual effective interest rate is 7% and the life of the system, after

upgrade is 50 years. What is the Present Value of the investment in the system?

Expert's answer

"C_o=\\$15,000, CF=\\$2,000, C=4,000" will reduce utility costs by 1000 annually, r=7%, t=50 years.The present value of the investment in the system will be calculated using the formula:

"NPV=-C_O+\\frac{C_1}{(1+R)}+....+\\frac{C_n}{(1+r)^n}"

"NPV=-15000+\\frac{2000}{1.07}+\\frac{2000}{1.07^2}+\\frac{2000}{1.07^3}+\\frac{2000}{1.07^4}+\\frac{2000}{1.07^5}-\\frac{4000}{1.07^5}+\\frac{1000}{1.07^6}+...+\\frac{1000}{1.07^{50}}=\\$188.19"

Learn more about our help with Assignments: Finance

## Comments

## Leave a comment