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1a The maintenance on a machine is expected to be $155 at the end of the...

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Finance

1a The maintenance on a machine is expected to be $155 at theend of the first year, then increasing by $35 each year for thenext 7 years. What sum of money would need to be set aside now topay the maintenance for the 8-year period? Assume 6% interest.

1b. Consider again the situation in question 1a. We wish now toknow the uniform annual equivalent maintenance cost. What is theequivalent A for the maintenance costs.

Answer & Explanation Solved by verified expert
4.3 Ratings (686 Votes)

1a)
Statement showing Cash flows
Particulars Time PVF @6% Amount PV
Cash Flows           1.00      0.9434      155.00      146.23
Cash Flows           2.00      0.8900      190.00      169.10
Cash Flows           3.00      0.8396      225.00      188.91
Cash Flows           4.00      0.7921      260.00      205.94
Cash Flows           5.00      0.7473      295.00      220.44
Cash Flows           6.00      0.7050      330.00      232.64
Cash Flows           7.00      0.6651      365.00      242.75
Cash Flows           8.00      0.6274      400.00      250.96
Present value of Cash Flows 1,656.97
Sum of money to be set aside now is $1656.97
working:
Calcuation of cashflows
Year 1=155
Year 2= 155+35=190
Year 3= 190+35=225
Year 4=225+35= 260
Year 5= 260+35=295
Year 6= 295+35=330
Year 7= 330+35=365
Year 8= 365+35=400
1-b) Calculation of annual equivalent maintenance cost:
EAC= Present value of cashflows/ PVAF@6% for 8 years
          = 1656.97/6.2098=$266.83
Therefore equivalent A for maintenance cost is $266.83

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Transcribed Image Text

1a The maintenance on a machine is expected to be $155 at theend of the first year, then increasing by $35 each year for thenext 7 years. What sum of money would need to be set aside now topay the maintenance for the 8-year period? Assume 6% interest.1b. Consider again the situation in question 1a. We wish now toknow the uniform annual equivalent maintenance cost. What is theequivalent A for the maintenance costs.

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