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A company buys a machine for $25,000. The annual cost of maintaining the machine is $500...

A company buys a machine for $25,000. The annual cost of maintaining the machine is $500 per year for the first 5 years (End of Year 1 thru End of Year 5) and then it increases to $750 for the next 5 years (Year 6 thru Year 10). Consider all cash flows to be end of year cash flows. For an interest rate of 8% per year compounded yearly, find the annual maintenance cost of the machine and the present worth of the total cost.

PLEASE HELP ASAP. SOLVE BY HAND

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Expert Solution

Year Cash Outflow P.V @ 8% P.V factor P.V of Cash Outflow(Cash Outflow*P.V Factor)
0 $                              25,000 1 1 $                   25,000.00
1 $                                    500 1/(1+0.08)^1 0.925925926 $                         462.96
2 $                                    500 1/(1+0.08)^2 0.85733882 $                         428.67
3 $                                    500 1/(1+0.08)^3 0.793832241 $                         396.92
4 $                                    500 1/(1+0.08)^4 0.735029853 $                         367.51
5 $                                    500 1/(1+0.08)^5 0.680583197 $                         340.29
6 $                                    750 1/(1+0.08)^6 0.630169627 $                         472.63
7 $                                    750 1/(1+0.08)^7 0.583490395 $                         437.62
8 $                                    750 1/(1+0.08)^8 0.540268885 $                         405.20
9 $                                    750 1/(1+0.08)^9 0.500248967 $                         375.19
10 $                                    750 1/(1+0.08)^10 0.463193488 $                         347.40
$                   29,034.38
The present worth of the total cost is $29034.38.

Annual Maintenance Cost=N.P.V/No. of Years

=$4034/10=$403.40

Rahul Sunny answered 1 year ago
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