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Mechanical Engineering Company purchased a new piece of equipment this year. The service contract is priced...

Mechanical Engineering Company purchased a new piece of equipment this year. The service contract is priced as follows: $35,000 this year, $38,000 in year 2, $41,000 in year 3, and this pattern will continue through year 10. Rather than pay a different amount each year, Mechanical Engineering Company would like to make a one-time payment at the beginning of the contract. How can the company determine the amount for the one-time payment? a. P/D*A/P b. P/A+P/G c. P/D*F/P d. P/A+P/G*A/P

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Answer #1

This is the arthimatic cash flow series

Amount is increasing by a constant amount of 3000 per year over the previous years amount

In order to find present value of this series we will have to use factors P/A + P/G

Therefore option b is correct

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