Engineers at Seaworld have completed an innovation on an existing water sports r

Question

Engineers at Seaworld have completed an innovation on an existing water sports ride to make it more exciting. The modification costs only $8,000 and is expected to last 6 years with a $1300 salvage value for the solenoid mechanisms, The maintenance cost is expected to be high at $1700 for the first year, increasing by 11% per year thereafter. Determine the equivalent present worth of the modification and maintenance cost. The interest rate is 8% per year. Pt = Pa + Pg Costs are negative cash flows calculate -8000-Pg Salvage value is a positive cash flow, present value of salvage Total

Explanation / Answer

Present worth = - modification costs - annual maintenance costs + salvage value(present value)

Present worth of the modification = - 8,000- 10125.44944 + 819 = - $17306.45

Present worth of the maintenance cost

year cash outflows pv factor @ 8% Present value 1 1,700 0.926 1574.2 2 1,887 0.857 1617.159 3 2,095 0.794 1663.08858 4 2,325 0.735 1708.85295 5 2,581 0.681 1757.46351 6 2,865 0.63 1804.6854 10125.4494

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