Lockheed Martin is increasing its booster thrust power in order to win more satellite launch contracts from European companies interested in new global communications markets. A piece of earth-based tracking equipment is expected to require an investment of $13 million. Annual operating costs for the system are expected to start the first year and continue at $0.9 million per year. The useful life of the tracker is 8 years with a salvage value of $0.5 million. Calculate the Annual Worth for the system if the corporate MARR is currently 12% per year.

Lockheed Martin needs to make $3,476,250 per year (during 8 years) to cover their costs and investment required for the project if their MARR is 12%.

Explanation:

required investment -$13,000,000

operating costs per year = -$900,000

8 years useful life, salvage value of $500,000

to calculate the annual worth we need to determine capital recovery of the project:

capital recovery = [-$13,000,000 x annuity factor PV (A/P, 12%, 8)] + [$500,000 x annuity factor (A/F, 12%, 8)] = (-$13,000,000 x .2013) + ($500,000 x .0813) = -$2,616,900 + $40,650 = -$2,576,250

this means that Lockheed Martin would need to earn $2,576,250 during 8 years just to recover their investment.

since the company will also incur in yearly operating costs, they must include them to determine the total annual worth of the project:

annual worth = -$2,576,250 - $900,000 = -$3,476,250