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Financial Management 一問
A new lighting system cost $180,000 will, if installed, reduce the company's electricity costs by $45,000 a year for each of the next 5 years. Also the company will receive government subsidy of $8,000 annually during the first 2 yers after installation. If the required internal rate of return (IRR) is 10%, advise whether the company should buy the new lighting system (assume no residual value for the new system and all future cash flows happen at each year end).
- PakLv 61 decade agoFavorite Answer
= PV of utility savings + PV of government subsidy - Cost of Installation
= [45,000/(1.1) + 45,000/(1.1^2) + 45,000/(1.1^3) + 45,000/(1.1^4) + 45,000/(1.1^5)] + [8,000/(1.1) + 8,000/(1.1^2)] - 180,000
= 45,000*[(1 - 1/1.1^6) / (1 - 1/1.1)] + [8,000/(1.1) + 8,000/(1.1^2)] - 180,000
= $215,585.40 + $13,884.30 - $180,000.00
= $49,469.70 (up to 2 decimal places) > 0
Hence the company should but the new lighting systemSource(s): 敬畏耶和華是智慧的開端；認識至聖者便是聰明。(箴言9:10)