Ferroelectronics wants to replace its aging production line in live years with n

Question

Ferroelectronics wants to replace its aging production line in live years with new equipment. Currently, the equipment has operating costs which are expected to be $5,000 in year 1. $6,000 in year 2. with costs increasing by $1,000 per year through year five. At the end of year five, the equipment will have a salvage value of $30, 000. The new equipment is expected to cost $150, 000 and the company uses an interest rate ot 16% per year compounded quarterly on its investments. The operating cost in year four will be: SmallCircle $10, 000 SmallCircle $7,000 SmallCircle $9,000 SmallCircle $8,000

Explanation / Answer

Operating cost in year four = cost in year 2 + increase of 1000 per year = 6000+1000+1000=8000

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