The owner of a business is considering investing $55,000 in new equipment. He estimates that the net cash flows will be $5,000 during the first year and will increase by $2,500 per year each year thereafter. The equipment is estimated to have a 10-year service life and a net salvage value at the end of this time of $6,000. The firm’s interest rate is 12%.
(a) Determine the annual capital cost (ownership cost) for the equipment.
(b) Determine the equivalent annual savings (revenues).
(c) Determine whether this investment is wise.