Question

Tanks to hold a corrosive chemical are now made of material A, have an 8 year life, and an initial cost of $30K. When the tanks are 4 years old, they must be relined at a cost of $10K. If the tanks were made of material B, their life would be 20 years and no relining is necessary If the minimum rate of return is 10%, what must be the first cost of a tank made from material B to make it economically equivalent to the material A tanks?

Answer 1

Discount rate	10.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
30,000.000	0	30,000.00	30,000.00
-	1	-	30,000.00
-	2	-	30,000.000
-	3	-	30,000.00
10,000.000	4	6,830.13	36,830.13
-	5	-	36,830.13
-	6	-	36,830.13
-	7	-	36,830.13
30,000.000	8	13,995.22	50,825.36
-	9	-	50,825.36
-	10	-	50,825.36
-	11	-	50,825.36
10,000.000	12	3,186.31	54,011.66
-	13	-	54,011.66
-	14	-	54,011.66
-	15	-	54,011.66
30,000.000	16	6,528.87	60,540.54

The investment at year 16 would make it last till 20 years without relining at the last year

cost = 60,540.54