A small company heats its building and spends $8,000 per year on natural gas for

Question

A small company heats its building and spends $8,000 per year on natural gas for this purpose. Cost increases of natural gas are expected to be 10% per year starting one year from now (i.e., the first cash flow is $8,800 at EOY one). Their maintenance on the gas furnace is $345 per year, and this expense is expected to increase by 15% per year starting one year from now. If the planning horizon is 15 years, what is the total annual equivalent expense for operating and maintaining the furnace? The interest rate is 18% per year??

Explanation / Answer

PNG= A1 { [1- (1+g )N/(1+i)N ]/[ i-g ] } = $8800 { [1- (1+0.10 )15/(1+0.18)15 ]/[ 0.18 - 0.10 ]

= $71,624.61

PMaint.= A1 { [1- (1+g )N/(1+i)N ]/[ i-g ] } = $ 396.75 { [1- (1+0.15 )15/(1+0.18)15 ]/[ 0.18 - 0.15 ]} =$3,229.21

A = (PNG + PMaint.)(A/P, 18%, 15) = $14,701.50

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