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What is the annual equivalent cost of a machine that costs $8,500 and has maintenance fees...

What is the annual equivalent cost of a machine that costs $8,500 and has maintenance fees of $250 in years 1 through 6 if this machine last 6 years and the real discount rate is 5%?

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Answer #1

n = 6 years

M = maintenance fees = $250

r = interest rate = 5%

Present Value of The cost = Machine cost + present value of maintenance fee

= Machine Cost + [M*[1 - (1+r)^-n] / r]

= $8,500 + [$250 * [1 - (1+5%)^-6] / 5%]

= $8,500 + [$250 * 0.253784603 / 0.05]

= $8,500 + $1,628.92302

= $9,768.92

Annual Equivalent Cost = [r*PV] / [1 - (1+r)^-n]

= [5% * $9,768.92] / [1 - (1+5%)^-6]

= $488.446 / 0.253784603

= $1,924.64789

Therefore, Annual Equivalent cost is $1,924.65

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