Answer:
The correct option is c. $1,103,784.
Explanation:
This can be calculated using the formula for calculating the present value of an ordinary annuity as follows:
PV = P * ((1 - (1 / (1 + r))^n) / r) …………………………………. (1)
Where;
PV = Present value or cost of the new process = $3.7 million = $3,700,000
P = Annual savings to recover the investment in 5 years = ?
r = interest rate = MARR + Inflation rate = 12% + 3% = 15%, or 0.15
n = number of years = 5
Substitute the values into equation (1) and solve for P, we have:
$3,700,000 = P * ((1 - (1 / (1 + 0.15))^5) / 0.15)
$3,700,000 = P * 3.3521550980114
P = $3,700,000 / 3.3521550980114
P = $1,103,768
From the options, the closet figure to $1,103,768 is c. $1,103,784. The difference is due the difference I rounding. Therefore, the correct option is c. $1,103,784. That is, the amount that must be saved each year to recover the investment in 5 years is $1,103,784.
