Question

1 A company that manufactures air-operated drain valve assemblies budgeted $84,000 per year for repair components over the next five years. Assume the company uses an interest rate of 10% per year. (a) If the company expects to spend $15,000 in year 1, what is the annual increase (arithmetic gradient) that the company expects in the cost of the parts

Answer 1

Step-by-step explanation:

Formula to be used is to calculate annual payment is:

A=G [ 1/I - n/[(1+I)^n - 1] ];

G - arithmetic gradient

n - number of years

I - interest rate

So,

84,000 = 15,000 + G [1/0.1 - 5/[(1+0.1)^5 - 1] ]

84,000 = 15,000 + G [10 - 5/[1.61051 - 1] ]

84,000 = 15,000 + G [10 - 5/0.61051]

84,000 = 15,000 + G [10 - 8.18987403974 ]

69,000 = 1.81012596026 G

G = 69,000/ 1.81012596026 = 38118.8942178