Cisco, Inc. has a proposal from the Engineering Planning Division to invest some of the Cisco retained earnings in the design, testing, and development of the next generation of smart grids useful in the Internet of Things (IoT) environment. The initial investment projection is $5,000,000 in year 0, $2,000,000 in year 10, and $100,000 in years 11 and beyond. At i = 10% per year, calculate the infinite-life equivalent annual cost in years 0 through infinity of the proposal.
What will be an ideal response?
Find PW in year -1; multiply by i
PW -1 = 5,000,000(P/F,10%,1) + 2,000,000(P/F,10%,11) + (100,000/0.10)(P/F,10%,11]
= 5,000,000(0.9091) + 2,000,000(0.3505) + 1,000,000(0.3505)
= $5,597,000
AW = 5,597,000(0.10)
= $559,700 per year
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