Question

a) A family is planning to buy a vacation cabin for $30,000. The family intends to keep
the cabin for 6 years and expects the annual unkeep and taxes to amount to $900
per year. Without any major repairs, the cabin should have a resale price of
$26,000. What is the equivalent annual cost of owning the cabin if the family’s
acceptable interest rate is 6%?

b) Maintenance records of a certain type of machine indicate that the first-year
maintenance cost of $80 increases by $30 per year over the 10-year replacement
period of the machine. Answer the following if the maintenance cost is considered to
occur at the end of the year and the firm’s interest rate is 12%:
a) What equal annual payments could the firm make to a service organization to
carry out the maintenance for 20 machines?
b) How much additional could be paid for a new type of machine with the same
service life that required no maintenance during its life?

Answer 1

a. Equivalent annual cost = $4048.30

b.(A) EUAC of maintenance = $187.54

b.(B) cost of machine = NPV = $1059.64

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