Question

Equipment that is purchased for $12,000 now is expected to be sold after ten years for $2,000. The estimated maintenance is $1,000 for the first year, but it is expected to increase $200 each year thereafter. The effective annual interest rate is 10%.

6. The present worth is most nearly:

(A) $16,000 (B) $17,000 (C) $21,000 (D) $22,000

7. The annual cost is most nearly: (A) $1,100

(B) $2,200 (C) $3,600 (D) $3,700

Answer 1

- Initial Purchase Price = $12,000

Estimated maintenance expenses in year 1 is $1000 which is expected to increase by $200 each year thereafter, Like $1200 in year 2, $1400 in year 3 and so on.

Salavge Value in year 10 = $2000

Cashflow in Year 10 = Maintenance expenses in year 10 - Salvage Value = $2800 - $2000

= $800

Calculating the Present Value of the Equipment cost today:-

Year	Cash Flow of Equipment ($)	PV Factor @10%	Present Value of Equipment ($)
0	12,000.00	1.00000	12,000.00
1	1,000.00	0.90909	909.09
2	1,200.00	0.82645	991.74
3	1,400.00	0.75131	1,051.84
4	1,600.00	0.68301	1,092.82
5	1,800.00	0.62092	1,117.66
6	2,000.00	0.56447	1,128.95
7	2,200.00	0.51316	1,128.95
8	2,400.00	0.46651	1,119.62
9	2,600.00	0.42410	1,102.65
10	800.00	0.38554	308.43
			21,951.75

So, The present worth is most nearly is $22,000

Option D

Note- PV Factor@10% can be taken from PVAF Table or calculated using this formula which is = 1/(1+0.10)^n

where, n = Respective year.

For example, PV Factor@10% of 2nd year = 1/(1+0.10)^2 = 1/1.21 = 0.82645

2) calculating the Equivalent Annual Cost(EAC) of equipment:-

where, r = Interest rate = 10%

NPV = $21,951.75

n = no of years = 10 years

EAC = $3572.55

So, annual cost is most nearly is $3600

Option C

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