Confused about present worth?
Posted: Thu Oct 28, 2010 11:31 am
I'm trying to do my Engineering Economics homework, which is essentially a finance class, and I absolutely cannot figure out the first practice problem we were given.
Many Chemicals Unlimited purchases a computer-controlled filter for $100,000. Half of the purchase price is borrowed from a bank at 18% compounded annually. The loan is to be paid back with equal annual payments over a 5 year period. The filter is expected to last 10 years, at which time it will have a salvage value of $10,000. Over the 10-year period the operating and maintenance costs are anticipated to equal $20,000/year; however, by making the investment, annual fines of $50,000 for pollution will be avoided. The firm expects to earn 12% on its investments. What's the present value?
The answer is: $65,085
I just don't know how to get to that answer - I feel like I've tried everything.
Many Chemicals Unlimited purchases a computer-controlled filter for $100,000. Half of the purchase price is borrowed from a bank at 18% compounded annually. The loan is to be paid back with equal annual payments over a 5 year period. The filter is expected to last 10 years, at which time it will have a salvage value of $10,000. Over the 10-year period the operating and maintenance costs are anticipated to equal $20,000/year; however, by making the investment, annual fines of $50,000 for pollution will be avoided. The firm expects to earn 12% on its investments. What's the present value?
The answer is: $65,085
I just don't know how to get to that answer - I feel like I've tried everything.