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Maintenance cost for a new system are estimated to be $150,000 in year 3 and $175,000 in years 4 to 10 of an expected 10-year life system. If similar systems will replace the current one, determine the perpetual equivalent annual maintenance cost at i = 10% per year.
Question 8 options:
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Question & Answer: Maintenance cost for a new system are estimated to be $150,000 in year 3 and $175,000 in yea…..
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| $-111,376 | |
| $-122,514 | |
| $-127,807 | |
| $-164,881 |
Expert Answer
| Calculation of Equivalent annual Cost | |||
| Year | Cash Outflow | PVF @ 10% | PV of Cash outflow |
| (A) | (B) | (A*B) | |
| 1.00 | – | 0.91 | – |
| 2.00 | – | 0.83 | – |
| 3.00 | 150,000.00 | 0.75 | 112,697.22 |
| 4.00 | 175,000.00 | 0.68 | 119,527.35 |
| 5.00 | 175,000.00 | 0.62 | 108,661.23 |
| 6.00 | 175,000.00 | 0.56 | 98,782.94 |
| 7.00 | 175,000.00 | 0.51 | 89,802.67 |
| 8.00 | 175,000.00 | 0.47 | 81,638.79 |
| 9.00 | 175,000.00 | 0.42 | 74,217.08 |
| 10.00 | 175,000.00 | 0.39 | 67,470.08 |
| 6.14 | 752,797.37 | ||
| Equivalent Annual Cost | = | Sum of NPV / Sum of PVF | |
| = | 752797.4/6.145 | ||
| = | 122,514 | Hence the answer is option B 122514 | |
