Question

UA wants to reduce water usage on campus by installing low-flow faucets and toilets.  There are two alternatives, both of which give the same benefits.  The first is to install equipment made by Company A at a cost of $10 million today and $1 million in maintenance costs per year for 15 years.  The second alternative is to install Company B’s equipment that costs $4 million today and $2 million in maintenance costs per year for 20 years. UA always needs to have faucets and toilets and, for simplicity, assume these costs will not change over time. The appropriate discount rate is 13.1%.  The equivalent annual cost of Company A's option is $________.

Round your answer to the second decimal place (e.g., 10.25 million).

Answer 1

Equated Annual cost = PV of Cash Outflows / PVAF ( r%,n)

PV of Cash outflows:

PVF (13.1%, 1) = 1/1.131

PVF (13.1%, 2) = 1/ (1.131)^2

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PVF (13.1%, 20 ) = 1 /(1.13)^20

PVAF for Company A - PVF for 1 to 15 Years

PVAF for Company B - PVF for 1 to 20 Years

Disc CF = Cash Flow * PVF

Equivalent Value of Company A is $ 2,555,419.10