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 6% interest to pay the cost of maintaining the equipment over the first six years of ownership?

		$289
		$206
		$254
		$229

Answer 1

Maintenance Cost will be 0 in first year, In second year it will be 20 and will increase by $20 in each subsequent year till year 6.

Maintenance Cost in Year 2 = $20

Maintenance Cost in Year 3 = $40

Maintenance Cost in Year 4 = $60

Maintenance Cost in Year 5 = $80

Maintenance Cost in Year 6 = $100

Now, Calculating its Present value today using Interest rate of 6%:-

Year	Cash Flow of Maintenance Cost($)	PV Factor @6%	Present Value of Cash Flow of Maintenance Cost ($)
1	0	0.94340	0
2	20.00	0.89000	17.80
3	40.00	0.83962	33.58
4	60.00	0.79209	47.53
5	80.00	0.74726	59.78
6	100.00	0.70496	70.50
			229.19

So, the amount must be set aside now is $229

Option 4