Question

"A manufacturing company is considering a new investment in a machine that will cost $170,000 and has a maintenance cost of $5,700 that occurs every 2 years starting at the end of year 2. Assuming that this equipment will last infinitely under these conditions, what is the capitalized equivalent cost of this investment at the rate of 13.6%? Enter your answer as a positive number."

Answer 1

The $5,700 disbursement at the end of 2 years may be resolved into an equivalent A.

A = F(Aj F, i, n)          = $5,700(A/ F, 13.6%, 2)

= $5,700(0.46816)

= $2,668.51

Each 2-year period is identical to this one and the infinite series

Capitalized cost P       = $170,000 + A÷I

                                    = $170,000 + $2,668.51÷0.136

                                    = $170,000 + $19,621.41

                                    = $189,621.41

Note: calculation hint for (A/ F, 13.6%, 2) using excel PMT function [=PMT(0.136,2,,-1)]