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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