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It is estimated that a certain piece of equipment can save $22,000 per year in labor...

It is estimated that a certain piece of equipment can save $22,000 per year in labor and materials cost. The equipment has an expected life of five years no market value. If the company must earn a 10% annual return on such investments, how much could be justified now for the pruchase of this piece of equipment?
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Answer #1

Justified price of equipment = Present value of all the annual benefits for 5 years

Present value of an annuity is given as

In this case,

P= $22000

r=10% = 0.1

n=5 years

Justified price of equipment = 22000*(1-(1+0.1)^-5)/0.1

Justified price of equipment = $83397.31

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