Question

The cost for manufacturing a component used in intelligent interface converters was $23,000 the first year. The company expects the cost to increase by 2% each year. Calculate the present worth of this cost over a fiveyear period at an interest rate of 10% per year.

Answer 1

Answer:

present worth = $7380

Explanation:

given data

initial cash flow = $23,000

geometric gradient = 2%

interest rate i = 10% per year

time period = 5 year

solution

we get here present worth  cost that is

present worth = initial cash flow  × $\frac{1-(\frac{1+g}{1+i})^t}{1-g}$    ......................1

put here value and we get

present worth =  $23,000  × $\frac{1-(\frac{1+0.02}{1+0.10})^5}{1-0.02}$    

present worth = $23,000  × 0.32087

present worth = $7380