Question

You have a future budget for maintaining equipment at your company. During each of the first 5 years, $10k per year will be budgeted. During the second 5 years, the annual budget will be $15k per year. Additionally, $5000 will be budgeted for an equipment overhaul at the end of the 4th year, then again at the end of the 8th year. Given an interest rate of 8% per year, what uniform annual expenditure would be equivalent, rounded to the nearest whole dollar (a positive value)?

Answer 1

First five years = $10,000 per year

Next five years = $15,000 per year

Equipment overhaul cost at 4^th year and 8^th year = $5000

Rate of interest = 8%

Life = 10 years

Calculate Equivalent annual cost.

Calculate NPW of the above cash flows

NPW = $10,000 (P/A, 8%, 5) + $15,000 (P/A, 8%, 5) (P/F, 8%, 5) + $5000 (P/F, 8%, 4)

+ $5000 (P/F, 8%, 8)

NPW = $10,000 (3.9927) + $15,000 (3.9927) (0.6806) + $5000 (0.7350)

+ $5000 (0.5403) = 87, 065

Equivalent annual cost = NPW (A/P, 8%, 10)

Equivalent annual cost = 87, 065 (0.1490) = 12, 973 (nearest whole dollar)