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Eddie's Precision machine shop is insured for $700,000. The present yearly insurance premium is $1.00 per $100 of coverage. A sprinkler system with an estimated life of 20 years and no salvage value can be installed for $20,000. Annual maintenance costs for the sprinkler system are $400. if the sprinkler system is installed, the system must be included in the shop's value for insurance purposes, but the insurance premium will reduce to $0.40 per $100 of coverage. Eddie uses a MARR of 15 percent/year.

a. what is the present worth of this investment?

b. what is the decision rule for judging the attractiveness of investment based on present worth?

c. is the sprinkler system economically justified?

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Accounting Basics, Accounting

Category:- Accounting Basics
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