Question

A compary provides systemmainderance for a yerver room ever a Byear period. They expect maintenance costs to be 50 in the first year, but then going up by $1300 per year every year after than (\$0 5150053000,54500 , etc) if the company expects an interest rate of 5% campounded yearly, how much should they charge per vear to break eyen on the iraintensence costs?

Answer 1

The company should charge approximately $2014.35 per year to break even on the maintenance costs.

Step-by-step explanation:

Calculating server room maintenance cost

Given:

• Initial maintenance cost: $50
• Annual increase in maintenance cost: $1300
• Years: 5
• Interest rate: 5%

Step 1: Calculate maintenance costs for each year

Year | Maintenance Cost

1 | $50

2 | $50 + $1300 = $1350

3 | $1350 + $1300 = $2650

4 | $2650 + $1300 = $3950

5 | $3950 + $1300 = $5250

Step 2: Calculate the present value of each year's maintenance cost

Present Value = Future Value / (1 + Interest Rate)^Years

Year | Maintenance Cost | Present Value _ |

1 | $50 | $50 / (1 + 0.05)^1 = $47.62 |

2 | $1350 | $1350 / (1 + 0.05)^2 = $1222.60 |

3 | $2650 | $2650 / (1 + 0.05)^3 = $2164.44 |

4 | $3950 | $3950 / (1 + 0.05)^4 = $3005.41 |

5 | $5250 | $5250 / (1 + 0.05)^5 = $3641.69 |

Step 3: Calculate the total present value of all maintenance costs

Total Present Value = $47.62 + $1222.60 + $2164.44 + $3005.41 + $3641.69

Total Present Value = $10071.76

Step 4: Calculate the annual charge to break even

Annual Charge = Total Present Value / Years

Annual Charge = $10071.76 / 5

Annual Charge = $2014.35

Therefore, the company needs to charge $2014.35 per year to break even on the server room maintenance costs over the 5-year period, considering the 5% annual interest rate.