Question

A reactor is purchased by a chemical plant. It is estimated that maintenance on the reactor will cost $5000 the first year and increase by $2000 each year after that. Approximately how much must be deposited in an account that pays 6% interest when the reactor is purchased to pay for maintenance over the next 5 years?

Need step by step solution And DON'T use table format and Excel formula  DON't USE---------- (interest table eg: P=A(P/A,6%,5) + G(P/G,6%,5)}-DON't USE

Answer 1

Annual cost is 5000 and it is increased by 2000 every year. This implies that the present discounted value of all these cash flows when added will give the amount that is required to be deposited now. Discount factor is (1 + 6%)^-n.

Year	Cash flow	Present discount factor
0
1	5000	0.943396	4716.981
2	7000	0.889996	6229.975
3	9000	0.839619	7556.574
4	11000	0.792094	8713.03
5	13000	0.747258	9714.356
Present value			36930.92

Hence, a total of $36,930.92 must be deposited in an account that pays 6% interest when the reactor is purchased to pay for maintenance over the next 5 years.