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Question1: A software company that installs systems for inventory control using RFID technology spent $500,000 per year for the past 5 years in developing its latest product
Question1: A software company that installs systems for inventory control using RFID technology spent $500,000 per year for the past 5 years in developing its latest product. The company wants to recover its investment in 4 years beginning 2 years from now. If the company signed a contract that will pay $250,000, 2 years from now and amounts increasing by a uniform amount each year through year 6, how much must the increase be each year, if the company uses an interest rate of 11% per year? · Draw the cash flow diagram: Question2: An environmental testing company needs to purchase $40,000 worth of equipment 2 years from now. At an interest rate of 18% per year compounded semiannually. Find the present worth of the amount expected to be paid using the two methods (the Nominal interest rate, and the effective interest rate). • Nominal interest rate: - Effective interest rate:
Expert Solution
Cost per year from last 5 years = 500,000
Revenue in first year = 250,000
Interest rate = 11%
| Year | Cost | Present value of cost | Revenue | Present value of revenue |
| 1 | 500,000 | 450,450.45 | - | |
| 2 | 500,000 | 405,811.22 | - | |
| 3 | 500,000 | 365,595.69 | - | |
| 4 | 500,000 | 329,365.49 | - | |
| 5 | 500,000 | 296,725.66 | - | |
| 6 | - | - | - | |
| 7 | - | - | - | |
| 8 | - | - | 250,000 | 108,481.62 |
| 9 | - | - | 250,000 + X | 97,731.19 + 0.391X |
| 10 | - | - | 250,000 + 2X | 88,046.12 + 0.704X |
| 11 | - | - | 250,000 + 3X | 79,320.83 + 0.952X |
| 1,847,948.51 | 373,579.75 + 2.047X |
Present value of cost and revenue must be same to recover investment,
1,847,948.51 = 373,579.75 + 2.047X
X = 720,258.31
Annual uniform increase must be 720,258.31
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