If Company ABC pays initial outlay of $247,146 in return of projected savings of $44,533/mo for the next 12 months, what is the rate of return?
I feel like this is a finance question related to PV of Annuity but my college days are well behind me.
I wanted to show it in excel but am not sure where to start!
In my mind, it's a good deal savings of 44,533/mo *12 mo = $534,396 > 4247,146. I know I am not considering the time value of money...
I would agree with your analysis. You have two competing alternatives. Pay $247,146 now or Pay 12*$44,533 for the year. The time value of money is probably not substantial over such a short period, even if you were paying usurious rates of 20% or more.
Your rate of return would be $534,396/247,146 -1 = 116%. Now if the lifespan of the two alternatives is longer than one year, you need to look at a life cycle cost analysis with estimated "cost" of money. Depending on the investment the rates can be quite low for public improvements (as low at 2-3%) to quite high for venture capital (15% or so) on a private investment.
This is really not an Excel problem, however. Hope this helps.
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