Labco Scientific sells high-purity chemicals to universities, research laboratories, and pharmaceutical companies. The company wants to invest in new equipment that will reduce shipping costs by better matching the size of the completed products with the size of the shipping container. The new equipment is estimated to cost $380,000 to purchase and install. How much must Labco save each year for 6 years in order to justify the investment at an interest rate of 7% per year?

$79,722

Explanation:

We have to calculate the Present value of annual cash inflow for 6 years at 7% per year.

So this means that:

Present Value = Annual savings * Present Value of Annuity Factor

Here

Annual Savings = $380,000 * 7% = $26,600

Present Value = Annual Savings * Annuity Factor

Here

Annual Saving is $26,600

Annuity Factor = (1 - (1 + r)^-n) / r

n is 6 year

r is 7%

So

Annuity Factor = (1 - (1 + 7%)^-6) / 7%

= 4.767

Hence

Present Value = $380,000 / 4.767

Present Value = $79,722

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