Answer to Question #240587 in Civil and Environmental Engineering for Alan Enrico V Tuib

Question

Vu Technology Corp just purchased new disaster simulation software for $10,000 now and having
annual payments per year for 10 years starting from now for annual upgrades. If the interest rate is 2%
per month
1) What is the annual worth of the payments?
2) What is the worth of the payments in the 10th year?

Answer 1

Part a) NPV = (-50,000 + 30,000) + (30,000/1.07) = $8,037.38

Part b) NPV = (-50,000 + 30,000) + (30,000/1.10) = $7,272.73

Explanation

Since, in each case, the NPV is higher than the NPV of the investment

($7,143), You can also think of it another way. The true

opportunity cost is what you could sell it for, i.e., $58,037 (or

$57,273).