Question

Equipment maintenance costs for manufacturing explosion-proof pressure switches are projected to be $125,000 in year one and increase by 3.5% each year through year five. What is the equivalent annual worth of the maintenance costs at an interest rate of 10% per year, compounded quarterly?

The equivalent annual worth is $ ?

Answer 1

Solution: Equivalent annual worth of the maintenance costs = 133180.9226

Equivalent annual interest rate = [(1 + (10/4)^4] - 1 = (1 + 0.025)^4 - 1 = 1.10381289 - 1 = 0.10381289 = 10.38%
Geometric gradient formula P= A*[1-((1+g)/(1+r))^n]/(r-g)
P = 125,000 * 1-((1.035)/(1.10381289))^5]/(10.381289%-3.5%)
P = 125,000 * 1-(0.9376589))^5]/(10.381289%-3.5%)
P = 125,000 * (1- 0.724810444) / (10.381289%-3.5%)
P = 125,000 * 3.9998482
P = 499,981.025
A = PMT( 10.381289%, 5, 499,981.025) using excel PMT= 133180.9226