A federal government contractor is considering buying a software package at a co

Question

A federal government contractor is considering buying a software package at a cost of $450,000. The software company will charge an annual maintenance fee of $25,000 payable at the beginning each year including the very first year. The contracting company is bidding on a four-year government contract. The equivalent uniform annual cost of the software that should be included in the bid at an interest rate of 20% is _____

A) $527,650

B) $517,346

C) $509,050

D) $550,000

Please show some work so I can follow along.

Explanation / Answer

A) the equavalent cost is

PVIFA is present value of interest annuity factor of oridinary annuity

but here it is annuity due in which payment is payable at the beginning of evry year.

so it is PVIFA*1.2

PV = 450000+25000*1.2*PVIFA(20,4) = 450000+25000*1.2*2.5887 = $527650

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