Question

MEDI EQUIP is a medical equipment manufacturer that uses compressed air in the pressure switches on its machines to control various mechanical movements. Over the course of two years, the factory has changed the layout of its machines several times. With each new arrangement, more tubing was added to the compressed air system for the new machines. None of the old, disused machines were plugged or disposed of, so the compressed air system is inefficient and full of leaks. If it continues to operate in this way, there will be a 7% increase in operating costs until year 5. In year 1, the energy consumption of the Kwh operating costs will be $ 54,600. The director wants to know the economic impact that the company will have if this is not repaired. What will the accumulated value of the costs be at the end of year 5 at an interest rate of 5%? PLACE YOUR NUMERICAL RESULT WITH A NEGATIVE SIGN BECAUSE THEY ARE COSTS

Answer 1

Computation of Accumulated value of cost at the end of year 5

Accumulated costs = First year costs * [(1 +Interest Rate)^years - (1 + growth rate)^Years) / (Interest Rate - Growth rate)

Accumulated costs = -54600 * [1.05^5 - 1.07^5) / (0.05-0.07)

Accumulated costs = -54600 * (1.2763 - 1.4026) / (-0.02)

Accumulated costs = -54600 * (-0.1263) / (-0.02)

Accumulated costs = -54600 * 6.3135

Accumulated costs = -$344717.56