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.

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?

Expert Solution

Present Value of maintenance payments=80/12%*(1-1/1.12^10)+30/(0.12*1.12^10)*((1.12^10-1)/0.12-10)=1059.641

Equal annual payments=1059.641*12%/(1-1/1.12^10)=187.540

Additional to be paid for machine with no maintenance=1059.641

jeff jeffy answered 2 years ago

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