Question

A small firm is considering purchasing a maintenance contract for its heating and air conditioning systems. Since all of its systems are new, the firm plans to begin the contract in year four and continue through year ten. The cost of the contract is $3,200 per year. The firm's minimum attractive rate of return is 12% per year. What is the present worth of this contract? Please use compound interest tables to find your answer

Answer 1

ANSWER:

Cost of contract = $3,200 ( year 4 to year 10)

i = 12%

n = 10 years

pw of contract = cost of contract(p/a,i,n) - cost of contract year 1 to 3(p/a,i,3)

i am including the cost of contract from 1 to 10 and then subtracting 3 years for easy calculations.

pw of contract = 3,200(p/a,12%,10) - 3,200(p/a,12%,3)

pw of contract = 3,200 * 5.65 - 3,200 * 2.402

pw of contract = 18,080 - 7,686.4

pw of contract = $10,393.6

hence the present worth of the contract is $10,393.6