Question

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 $

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