Question & Answer: Maintenance cost for a new system are estimated to be $150,000 in year 3 and $175,000 in yea…..

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:

$-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
Still stressed from student homework?
Get quality assistance from academic writers!