A forklift will last for only 2 more years. It costs $5,300 a year to maintain.
ID: 2776701 • Letter: A
Question
A forklift will last for only 2 more years. It costs $5,300 a year to maintain. For $23,000 you can buy a new lift that can last for 10 years and should require maintenance costs of only $2,300 a year.
1). Calculate the equivalent cost of owning and operating the forklift if the discount rate is 5% per year.(Do not round intermediate calculations. Round your answer to 2 decimal places.)
2). Calculate the equivalent cost of owning and operating the forklift if the discount rate is 14% per year.(Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
Calculation of the equivalent Annual cost if the discount rate is 5%:
Year
Cash Flow (CF)
PVF (5%)
PV = CF * PVF
Purchase Price
0
$ 23,000.00
1
$ 23,000.00
Annual Maintenance Cost
1 to 10
$ 2,300.00
7.72173
$ 17,759.99
Total Present value of costs (A)
$ 40,759.99
PVAF (5%, 10 years) (B)
7.72173
Equivalent Annual cost= A/B
5,278.61
Calculation of the equivalent Annual cost if the discount rate is 10%:
Year
Cash Flow (CF)
PVF (10%)
PV = CF * PVF
Purchase Price
0
$ 23,000.00
1
$ 23,000.00
Annual Maintenance Cost
1 to 10
$ 2,300.00
6.14457
$14,132.50
Total Present value of costs (A)
$ 37,132.50
PVAF (10%, 10 years) (B)
6.14457
Equivalent Annual cost= A/B
6,043.14
Calculation of the equivalent Annual cost if the discount rate is 5%:
Year
Cash Flow (CF)
PVF (5%)
PV = CF * PVF
Purchase Price
0
$ 23,000.00
1
$ 23,000.00
Annual Maintenance Cost
1 to 10
$ 2,300.00
7.72173
$ 17,759.99
Total Present value of costs (A)
$ 40,759.99
PVAF (5%, 10 years) (B)
7.72173
Equivalent Annual cost= A/B
5,278.61
Calculation of the equivalent Annual cost if the discount rate is 10%:
Year
Cash Flow (CF)
PVF (10%)
PV = CF * PVF
Purchase Price
0
$ 23,000.00
1
$ 23,000.00
Annual Maintenance Cost
1 to 10
$ 2,300.00
6.14457
$14,132.50
Total Present value of costs (A)
$ 37,132.50
PVAF (10%, 10 years) (B)
6.14457
Equivalent Annual cost= A/B
6,043.14
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