Question

Green Power Company is considering acquiring a new machine that will last 14 years and it can be purchased right now for 114007 dollars; maintenance will cost 39927 dollars the first year, increasing by 7638 dollars per year thereafter (e.g. maintenance at the end of year two is equal to 39927 plus 7638 dollars). If the interest rate is 8% per year, compounded annually, how much money should the company set aside now to purchase and provide for the future maintenance of this machine (NPV)?

Answer 1

Required present worth of money to be set aside is computed as follows.

Working notes:

Maintenance cost, year N = Maintenance cost x year (N - 1) + $7638

PV Factor for year N = (1.08)^-N

Year	Cost ($)	PV Factor @8%	Discounted Cost ($)
	(A)	(B)	(A) x (B)
0	114007	1.0000	114007.00
1	39927	0.9259	36969.44
2	47565	0.8573	40779.32
3	55203	0.7938	43821.92
4	62841	0.7350	46190.01
5	70479	0.6806	47966.82
6	78117	0.6302	49226.96
7	85755	0.5835	50037.22
8	93393	0.5403	50457.33
9	101031	0.5002	50540.65
10	108669	0.4632	50334.77
11	116307	0.4289	49882.08
12	123945	0.3971	49220.26
13	131583	0.3677	48382.80
14	139221	0.3405	47399.33
		Present Worth ($) =	775215.93