2.2. Example Calculation of Present Worth

Try these first

1. 1.

   Define the uniform series capital recovery factor.

   Hint

   Think about loan repayments.

2. 2.

   What does the present worth factor help you calculate?

   Hint

   Recall our discussion on cash flow valuation.

3. 3.

   What does the uniform series capital recovery factor determine?

   • Loan repayment amount
   • Total cost of ownership
   • Future cash flows

   Hint

   Think about the purpose of loan repayments.

4. 4.

   True or False: The present worth factor can be used to calculate future cash flows.

   • True
   • False

   Hint

   Recall how we evaluated cash flows.

5. 5.

   A landscaping business needs to evaluate the purchase of a new lawnmower. The purchase price is $20,000, with an expected resale value of$5,000 after 5 years. If the interest rate is 5%, calculate the annualized ownership cost.

   Hint

   Consider how to calculate both the depreciation and any associated operating expenses.

6. 6.

   A company plans to replace machinery costing $100,000 after its 7-year life. They need to know how much to deposit each year into a sinking fund that compounds at a rate of 6% to gather the needed amount when the machine is replaced. Calculate the annual deposit amount.

   Hint

   Think about using the sinking fund formula to find the annual deposits needed.