Question

A short concrete canal can be constructed as part of a flood control project. The cost of the canal, which will last a very long time, is $90,000, and maintenance costs will average $700 a year and a major cleaning operation that costs $10,000 will be needed every 15 years. Salvage value is negligible. If the government interest rate is 6% determine the equivalent annual cost. Enter a positive value as this is a cost.

Answer 1

The formula is as below:

EAC = Initial cost (A/P, interest rate, number of years) + Annual maintenance cost + Annual cleaning cost

            = 90,000 (A/P, 6%, 15) + 700 + 10,000

Now the “compound interest table” as per 6% rate for 15 years gives A/P factor as 0.1030. This is to be inserted in the above formula.

EAC = 90,000 × 0.1030 + 700 + 10,000

            = 9,270 + 700 + 10,000

            = 19,970 (Answer)