3 A small company purchased now for 340000 will lose 12200 e

3. A small company purchased now for $340,000 will lose $12,200 each year the first five years. An additional $20,000 invested in the company during the third year will result in a profit of $60,000 each year from the ten year through the twenty-five year. An additional investment of $10,000 is required at the fifteen and twenty year. At the end of 25 years, the company can be sold for $40,000. The MARR is 6% per year. a. What is the present worth of this investment? Would you recommend buying this company?

Solution

3.

A.

R = 6%

Present worth of the investment = present value of benefits – present value of the costs

Present worth of the investment = ((60000*(1-1/1.06^16)/.06)*(1/1.06^9) + 40000/1.06^25 ) - (340000 + 12200*(1-1/1.06^5)/.06 + 20000/1.06^3 + 10000/1.06^15 + 10000/1.06^20)

Present worth of the investment = -$47254.1

Since the present worth of the investment is negative that is -$47254.1, then buying of the company cannot be recommended.