A consulting engineer bought a copier machine. There will be no maintenance cost

Question

A consulting engineer bought a copier machine. There will be no maintenance cost the first year, as it was bought with a year's free maintenance. In the second year, the maintenance costs will be about $20 for that year. In subsequent years, the maintenance cost will increase $20 per year: 3rd year is $40, 4th year is $60, and so on. The engineer wants to set aside money now, so that he can pay off the anticipated maintenance costs for 6 years. Assume the maintenance costs are incurred at the end of each year of interest. Inflation is assumed at 6%, compounded annually, for those six years.Which loan amount is closest?

a.

b.

c.

d.

Response Feedback: you use each payment separately in the P = F(1+i)^(-n) equation, and add up the totals. You cannot use uniform payments, as there is no payment at end of year 1.

Explanation / Answer

a.

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