Question

Nippon Steel’s expenses for heating and cooling a large manufacturing facility are expected to increase according to an arithmetic gradient beginning in year 2. If the cost is $550,000 this year (year 0) and will be $550,000 again in year 1, but then it is estimated to increase by $52,000 each year through year 12, what is the equivalent annual worth in years 1 to 12 of these energy costs at an interest rate of 13% per year?

The equivalent annual worth is determined to be $ ?

Answer 1

Equivalent annual worth = 550,000(A/P, 13%, 12) + [550,000 + 52,000(A/G, 13%, 12)]

                                        = 550,000(0.1690) + [550,000 + 52,000(4.094)]

                                        = 92,950 + 762,888

                                         = $855,838