Question

Question 8 25 pts The initial cost of a machine is $10,000. The selling company has to maintain the machine for the next years, and the maintenance cost for years are as below and paid at the year. It increases every year because the machine gets old every year. What is the net investment cost of the machine including the maintenance cost for the 7 years? Nominal interest rate 9% [SUBMIT/UPLOAD YOUR WORK Draw the cash flow diagram, too. Year 1 3 4 5 6 7 2 150 Cash flow 100 200 250 300 350 400 IU A - A - IE * 1 1 1 X X 5 = V GT 12pt Paragraph

Answer 1

For the purpose of calculatiuon of net investment including maintenance cost, we will have to first calculate the present va,use of all the cash outflows.

Present value formula : cash outflow /(1+r)^t

for eg. PV of 100 at 9% rate is = 100(1+.09)^1 = 91.7

PV of 150 at 9% rate is = 150(1+.09)^2 = 126.30

The sum of all the present values shall be the net investment cost of the machine as shown in the table below.

Year	r	Maintenance cost	Purchase cost	PV of cash outflow
0	0%	0	10000	10000
1	9%	100	0	91.7
2	9%	150	0	126.3
3	9%	200	0	154.4
4	9%	250	0	177.1
5	9%	300	0	195.0
6	9%	350	0	208.7
7	9%	400	0	218.8
			Total PV of cash outflows	11172.0