A company that manufactures high-speed sub­mersible rotary-indexing spindles is considering an upgrade of production equipment to reduce costs over the next 5 years. The company can in­vest $80,000 now, 1 year from now, or 2 years from now. Depending on when the investment is made, the savings will vary. The saving estimates are $26,000, $31,000, or $37,000 per year if the investment is made now, 1 year from now, or 2 years from now, respectively. The company will only invest if the ROR is at least 20% per year. Using a future worth analysis, determine if the timing of the investment will affect the return re­quirement and, if so, when the investment should be made. Solve by (a) hand, and (b) spreadsheet.

Question

What will be an ideal response?

Answer 1

(a) By hand:

Invest now: FW = -80,000(F/P,20%,5) + 26,000(F/A,20%,5)

= -80,000(2.4883) + 26,000(7.4416)

= $-5582 (< 20% per year)

Invest 1 year from now: FW = -80,000(F/P,20%,4) + 31,000(F/A,20%,4)

= -80,000(2.0736) + 31,000(5.3680)

= $520 (> 20% per year)

Invest 2 years from now: FW = -80,000(F/P,20%,3) + 37,000(F/A,20%,3)

= -80,000(1.7280) + 37,000(3.6400)

= $-3560 (< 20% per year)

Timing will affect the return requirement of 20%; invest 1 year from now.



(b) Spreadsheet: Same result using the FV function = - FV(20%,n,savings,-80000)