Question #240587

Vu Technology Corp just purchased new disaster simulation software for $10,000 now and having

annual payments per year for 10 years starting from now for annual upgrades. If the interest rate is 2%

per month

1) What is the annual worth of the payments?

2) What is the worth of the payments in the 10th year?

annual payments per year for 10 years starting from now for annual upgrades. If the interest rate is 2%

per month

1) What is the annual worth of the payments?

2) What is the worth of the payments in the 10th year?

Expert's answer

Part a) NPV = (-50,000 + 30,000) + (30,000/1.07) = $8,037.38

Part b) NPV = (-50,000 + 30,000) + (30,000/1.10) = $7,272.73

Explanation

Since, in each case, the NPV is higher than the NPV of the investment

($7,143), You can also think of it another way. The true

opportunity cost is what you could sell it for, i.e., $58,037 (or

$57,273).

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