Question

q4. 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. Consider again the situation in question 4. We wish now to know the uniform annual equivalent maintenance cost. Compute an equivalent A for the maintenance costs

Answer 1

Question 4(a)

Base amount (A) = 155

Maintenance amount will increase by 35 each year.

So,

G = 35

Interest rate = 6%

Time period = 8 years

Calculate the present value -

PV = 155(P/A, 6%, 8) + 35(P/G, 6%, 8)

PV = (155 * 6.2098) + (35 * 19.8416)

PV = 962.52 + 694.46

PV = 1656.98

The sum of money to be set aside now is $1,656.98

Question 4(b)

Calculate the equivalent annual cash flow -

A = 155 + 35(A/G, 6%, 8)

A = 155 + (35 * 3.1952)

A = 155 + 111.83

A = 266.83

An equivalent A for the maintenance cost is $266.83