A DSL company has made an equipment investment of $40 million with the expectation that it will be recovered in 10 years. The company has a MARR based on a real rate of return of 12% per year. If inÂflation is 7% per year, how much must the company make each year (a) in constant-value dollars, and (b) in future dollars, to meet its expectation?
What will be an ideal response?
(a) In constant value dollars, use i = 12% to recover the investment
A = 40,000,000(A/P,12%,10)
= 40,000,000(0.17698)
= $7,079,200
(b) In future dollars, use if to recover the investment
if = 0.12 + 0.07 + (0.12)(0.07) = 0.1984 (19.84%)
A = 40,000,000(A/P,19.84%,10)
= 40,000,000(0.23723)
= $9,489,200
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