Question

2.4 Twenty-First Century manufacturers are planning to acquire a new machine that will cost $5,000. The machine's estimates life is 10-years. The machine is expected to be trouble free during the first year of operation. The maintenance costs for the subsequent four years of operation are estimated at $100, $200, $300, and $400 respectively. The machine will require an overhaul halfway through its life at a cost of $2,000. The maintenance costs following the mid-life overhaul are estimated at $200 per year increasing by 10% per year through the end of the machine's life. Compute how much should be budgeted to pay for the purchase, future overhaul, and annual maintenance of the machine. The company is making its plans using an interest rate of 10% compounded annually (10-points)

Answer 1

Year O 1 2 3 4 5 6 7 8 9 10 Purchase Cost Maintenance Cost Overhaul Cost Total Cost PV Factor @ 10% Present Value $ 5,000.00 $ - $ . $5,000.00 1 $ 5,000.00 $ - $ - $ - $ - 0.909090909 $ . $ - $ 100.00 $ - $ 100.00 0.826446281 $ 82.64 $ - $ 200.00 $ - $ 200.00 0.751314801 $ 150.26 $ - $ 300.00 $ - $ 300.00 0.683013455 $ 204.90 $ 400.00 $ 2,000.00 $ 2,400.00 0.620921323 $ 1,490.21 $ 200.00 $ - $ 200.00 0.56447393 $ 112.89 $ 220.00 $ - $ 220.00 0.513158118 $ 112.89 $ Ş 242.00 $ - $ 242.00 0.46650738 $ 112.89 $ - $ 266.20 $ - $ 266.20 0.424097618 $ 112.89 $ - $ 292.82 $ - $ 292.82 0 .385543289 $ 112.89 TOTAL BUDGETED COST $ 7,492.50 $

Notes:

1. It is assumed that all the maintenance expenses are incurred at the end of the year.
2. The overhaul expense is incurred at the end of 5 years i.e. mid-life overhaul expense.