Question

Problem Ten (10 points) A company owns a fleet of trucks and operates its own maintenance shop. A particular type of truck is normally used for five years. The first cost is $30,500 and the end of life salvage value is $7,750. The maintenance costs are $900 for the first year and an additional $250 per year thereafter] Assuming an interest rate of 7.5%, find the equivalent per-year cost of owning and maintaining one of these vehicles.

Answer 1

At end of years	Discount factor @7.5%
1	1.00000
2	0.93023
3	0.86533
4	0.80496
5	0.74880
Total discounting factor for 5 years @ 7.5%	4.34933

Maintenance cost increase 250 every year.
Salvage value is cash inflow. So we can use minus sign for salvage value.
At end of years	First cost	Maintenance cost	Salvage value	Net cash outflow	Discount factor @7.5%	Present value
0	30500			30500	1.00000	30500.00
1		900		900	0.93023	837.21
2		1150		1150	0.86533	995.13
3		1400		1400	0.80496	1126.94
4		1650		1650	0.74880	1235.52
5		1900	-7750	-5850	0.69656	-4074.87
Present value of cash outflow during 5 year						30619.94
Total discounting factor for 5 years @ 7.5%						4.34933
Equivalent per unit cost of owning and maintaining of vehicle (30619.94/4.34933)						7040.16