Quiz 6: Annual-Equivalence Analysis

Business

Annual equal payments are made by the borrower to a lender at a specified date at each month. Thus, the borrower pays both interest and principal each month.Use the following formula to calculate the annual equal payments: img Here, AE = annual equal payments, r = interest rate, n = number of years. Principal amount = $300,000, Interest rate = 9%, Number of years = 5. Now, use the following formula to calculate the annual equal payments: img See appendix C in the text book to find the factor value at 9% for the 5 years. Thus, the factor value is 0.2571. img Thus, the annual equal payment is $77,130.

Given information: • Investment is $80,000. • Revenue is $50,000. • Revenue increases by $30,000 each year. • Cost is $20,000. • Cost increases by $10,000 each year. • Time period is 5 years. • Minimum attractive rate of return is (MARR) 12 percent. Annual equivalent value: Annual equivalent value can be calculated by using the following formula: img …… (1)Here, i = Interest rate n = Time period Substitute the respective values in Equation (1) to calculate the annual equivalent value. img img img Thus, the annual equivalent value is img . Hence, option (d) is the correct answer.

It is given that the amount of investment is $250,000. The investor wants to know about the uniform equal annual revenue that is required to recover the initial amount of investment plus the interest in 3 years. The rate of interest is 12% Following is the formula to calculate the amount of uniform annual revenue: img Here, P is the amount of initial investment ($250,000)i is the interest rate (12%)n is the time period (3 years)Substitute the values in above equation. img Thus, the amount of required equal annual revenue is $104,075