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Equivalence When PP>=CP Equipment maintenance costs for manufacturing explosion-proof pressure switches are projected to be $125,000...

Equivalence When PP>=CP

Equipment maintenance costs for manufacturing explosion-proof pressure switches are projected to be $125,000 in year one and increase by 2.5% each year through year five. What is the equivalent annual worth of the maintenance costs at an interest rate of 10% per year, compounded monthly?

The equivalent annual worth is $

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Homework Answers

Answer #1

Effective annual interest rate = (1+r/n)^n-1

=(1+0.01/12)^12-1

=0.104713 = 10.47%

Finding present value of maintenance cost

year O&M Cost PV Factor Present Value
1 -125,000.00 0.954991 -119373.91
2 -128,125.00 0.912008 -116851.06
3 -131,328.13 0.87096 -114381.54
4 -134,611.33 0.831759 -111964.20
5 -137,976.61 0.794323 -109597.96
-572168.68

Annual worth = present worth * ( A/P, 10.4713%, 5yrs)

=-572168.68*0.266981

=-152758.2

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