1a The maintenance on a machine is expected to be $155 at the end of the...

1a The maintenance on a machine is expected to be $155 at the end of the first year, then increasing by $35 each year for the next 7 years. What sum of money would need to be set aside now to pay the maintenance for the 8-year period? Assume 6% interest.

1b. Consider again the situation in question 1a. We wish now to know the uniform annual equivalent maintenance cost. What is the equivalent A for the maintenance costs.

Expert Solution

1a)
Statement showing Cash flows
Particulars	Time	PVF @6%	Amount	PV
Cash Flows	1.00	0.9434	155.00	146.23
Cash Flows	2.00	0.8900	190.00	169.10
Cash Flows	3.00	0.8396	225.00	188.91
Cash Flows	4.00	0.7921	260.00	205.94
Cash Flows	5.00	0.7473	295.00	220.44
Cash Flows	6.00	0.7050	330.00	232.64
Cash Flows	7.00	0.6651	365.00	242.75
Cash Flows	8.00	0.6274	400.00	250.96
Present value of Cash Flows				1,656.97

Sum of money to be set aside now is $1656.97

working:
Calcuation of cashflows
Year 1=155
Year 2= 155+35=190
Year 3= 190+35=225
Year 4=225+35= 260
Year 5= 260+35=295
Year 6= 295+35=330
Year 7= 330+35=365
Year 8= 365+35=400

1-b) Calculation of annual equivalent maintenance cost:

EAC= Present value of cashflows/ PVAF@6% for 8 years
= 1656.97/6.2098=$266.83

Therefore equivalent A for maintenance cost is $266.83

jeff jeffy answered 1 year ago

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