Question

A machine costs $270,000 and has a life of 12 years. The machine will be under total warranty for 3 years. In the 4th year the maintenance cost is estimated to be $3,500, and increases by $1,750 each year till the 12th year. What amount will the company have to put aside at 6% interest per annum compounded yearly for the maintenance?a. Around $36,200b. Around $45,800c. Around $56,100d. Around $65,300

Answer 1

C) Around $56,100

Step-by-step explanation:

total maintenance costs should be:

year cost

1 $0

2 $0

3 $0

4 $3,500

5 $5,250

6 $7,000

7 $8,750

8 $10,500

9 $12,250

10 $14,000

11 $15,750

12 $17,500

to determine the present value of the 12 year annuity we can use an excel spreadsheet and the present value function:

=PV (6%,select the 12 cells) = $56,099.39 ≈ $56,100