Question
In: Economics
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
Solutions
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
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