Question

Skyward Construction has just purchased a new D9 bulldozer for $675,000. The annual insurance is $7,000. The annual maintenance cost for the first 4 years is $12,500, at which time the equipment is given a major overhaul for $75,000. For the next 4 years, the annual maintenance cost is $22,500. At that time the piece has a salvage value of $100,000. Draw the cash flow diagram. What is the present value of the investment? What is the EUAC? Assume a 5% annual inflation rate.

Answer 1

	Present Value (PV) of Cash Flow:
	(Cash Flow)/((1+i)^N)
	i=Discount Rate=inflation rate=5%
	N=Year of Cash Flow
	N	A	B=A/(1.05^N)
	Year	CASH FLOW	Present Value
	0	($675,000)	$      (675,000.00)
	1	($7,000)	$           (6,666.67)
	2	($7,000)	$           (6,349.21)
	3	($7,000)	$           (6,046.86)
(-75000-7000)	4	($82,000)	$        (67,461.60)
	5	($22,500)	$        (17,629.34)
	6	($22,500)	$        (16,789.85)
	7	($22,500)	$        (15,990.33)
(-22500+100000)	8	$77,500	$           52,455.05
		SUM	$      (759,478.80)
	PRESENT VALE OF THE INVESTMENT	$     759,478.80
	Equated Uniform Annual Cost(EUAC)	$117,507.94	(Using excel PMT function with Rate=5%, Nper=8, PV=-759478.80)