In: Economics
A contractor is planning to buy an office trailer for $28000.
They intend to keep the trailer for 5 years and expect that
maintenance will remain at $950 per year over this period. The
trailer is also subject to an annual tax which will be $55 at the
end of the first year but is expected to increase by %20 each year
after that.
What is the equivalent annual cost of owning this trailer when the
interest rate is 9%?
Ans. Cashflow in,
Year 0 = -$28000
Year 1 = - (950 + 55) = -$1005
Year 2 = - (950 + 1.20*55) = -$1016
Year 3 = - (950 + 1.20^2 * 55) = -$1029.2
Year 4 = - (950 + 1.20^3 * 55) = -$1045.04
Year 5 = - (950 + 1.20^4 * 55) = -$1064.05
The present value of the given cashflow at 9% interest rate,
PV = -28000 - 1005/(1+0.09) - 1016/(1+0.09)^2 - 1029.2/(1+0.09)^3 - 1045.04/(1+0.09)^4 - 1064.05/(1+0.09)^5
=> PV = -$32003.79
Thus, for annual equivalent cost, A,
PV = A*(P/A, 9%, 5)
=> -32003.79 = A*[(1-1/(1+0.09)^5)/0.09]
=> A = -$8227.933
Thus, the annual equivalent cost is $8227.933