Professor Shelley is creating a budget for her recently awarded research grant.

Question

Professor Shelley is creating a budget for her recently awarded research grant. Her research requires a heavy-duty generator that has an initial cost of $34833. She estimates she will need to pay for maintenance on the generator beginning at the end of year 5. She will pay maintenance costs each year for the next 5 years. At that point, she will either scrap her research or submit a new research proposal. She estimates the first year of maintenance will cost $475, with the maintenance costs increasing by $58 per year for each year after that. How much should she put in her budget for maintenance costs? She is using a 5% interest rate.

Explanation / Answer

Year Maint Cost Discount Factor @5% PV 5 475 0.78353             372 6 533 0.74622             398 7 591 0.71068             420 8 649 0.67684             439 9 707 0.64461             456 10 765 0.61391             470 PV of maint Costs          2,555 She will Put - $2,555 for Maint Cost in Budget

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