Van Hookie, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds w
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Answer: Annual Worth = Present Worth÷[PV(15%,20 yrs)]
= -$4,852.42÷6.25933
= (-)$775.23
Here, the annual worth of the given system is negative (i.e. - $775.23).
The filter is not justified economically, this is because the present worth and annual worth of the system(investment) is negative,
Explanation:
In order to calculate the annual worth, we'll first compute the existing insurance premium and new insurance premium using the following formula.
i.e. Existing Insurance premium = ($700,000÷$100)×$1.00 = $7,000
New Insurance Premium (after installing sprinkler) = = $2,880
Now, evaluating Savings in insurance premium.
Saving in Insurance Premium = Existing Insurance premium - New Insurance Premium
= $7,000 - $2,880 = $4,120 (this will be considered as annual cash flows)
Given :
Annual maintenance costs for sprinkler system = $1,700
Investment in Sprinkler system = $20,000
∴ Net annual cash inflows = Saving in Insurance Premium - Annual maintenance costs
= $4,120 - $1,700 = $2,420
Now, Present worth of the system is given as :
Present Worth of system = [Net Annual Cash Flows×PV(15%,20 yrs)] - Investment cost
= ($2,420×6.25933) - $20,000 = $15,147.58 - $20,000 = (-)$4,852.42
Annual Worth = Present Worth÷[PV(15%,20 yrs)]
= -$4,852.42÷6.25933
= (-)$775.23
Here, the annual worth of the given system is negative (i.e. - $775.23).
2) The filter is not justified economically, this is because the present worth and annual worth of the system(investment) is negative,