Question

An engineer has recently purchased a new piece of equipment to use in analyzing geological formations.  The equipment has no maintenance costs the first year due to a one year's free maintenance warranty.  In the second year, it is expected to cost $20 to maintain the equipment and in subsequent years the cost of maintenance will increase by $20 per year (i.e. maintenance cost is $40 in year three, $60 in year four, and so on). Approximately what amount must be set aside now at 9% interest to pay the cost of maintaining the equipment over the first six years of ownership?

Answer 1

You purchased an equipment recently which requires maintenance each year. Maintenance cost for the first year is 0 as it is under maintenance warranty.

Maintenance cost in year 2 is $20 and then in year 3 is $40 and it goes on by increasing $20 per year until the first 6 years.

Calculating the Present value of the maintenance cost to set aside amount:-

Year	Cash out Flow towards Maintenance Cost($)	PV Factor @9%	Present Value of Cash out Flow towards Maintenance Cost ($)
1	0	0.91743	0
2	20.00	0.84168	16.834
3	40.00	0.77218	30.887
4	60.00	0.70843	42.506
5	80.00	0.64993	51.995
6	100.00	0.59627	59.627
			201.848

So, the amount to be set aside today for Maintenance cost is $201.85