4. A manufacturing plant purchases equipment for $100,000 which it intends to se

Question

4. A manufacturing plant purchases equipment for $100,000 which it intends to sell after 10 years for $20,000 salvage. The maintenance costs are estimated to be $2,000 the first year and increase by $500 each year thereafter. Using a nominal rate of 7%, find the present worth (i.e. present value) of the project. 4. A manufacturing plant purchases equipment for $100,000 which it intends to sell after 10 years for $20,000 salvage. The maintenance costs are estimated to be $2,000 the first year and increase by $500 each year thereafter. Using a nominal rate of 7%, find the present worth (i.e. present value) of the project. 4. A manufacturing plant purchases equipment for $100,000 which it intends to sell after 10 years for $20,000 salvage. The maintenance costs are estimated to be $2,000 the first year and increase by $500 each year thereafter. Using a nominal rate of 7%, find the present worth (i.e. present value) of the project.

Explanation / Answer

PV = FV / (1 + r)t

The simple interest per year is 7% .

maintenance cost will be

2000+2500+3000+3500+4000+4500+5000+5500+6000+6500=42500

So present worth of the project is 100000 - 42500 - 20000 + 10000(107/100)10

= 37500+ 1.96(10000) = 37500+19600 = 57100

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