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appropriate formulae in a paper neatly to upload in the moodle The maintenance on a machine is expected to be BD 350 after year 1 and expected to increase BD 30 per year
appropriate formulae in a paper neatly to upload in the moodle The maintenance on a machine is expected to be BD 350 after year 1 and expected to increase BD 30 per year. What present sum need to be set aside now to pay the maintenance for nine year period. Assume i= 6.5%.
Expert Solution
The amount of cash that needs to be kept aside currently to pay the maintenance for the nine year period is the net present worth of the expected costs over the course of the nine year period.
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Costs incurred in the respective years | 350 | 400 | 450 | 500 | 550 | 600 | 650 | 700 | 750 |
| Present worth of the costs in the years | 328.64 | 352.66 | 372.53 | 388.66 | 401.43 | 411.20 | 418.28 | 422.9 6 | 425.51 |
Costs incurred in the respective years = the annual maintenance costs in the respective years ( i.e BD 350 in year 1 and increasing BD 50 per year )
Present worth of the costs in the respective years = ( annual maintenance cost in the respective year ) / ( 1 + interest rate ) year
For example, present worth of the costs in year 3 = 450 / ( 1 + 0.065 )3 = BD 372.53
Net present worth = sum of present worth of costs in all years
Net present worth = BD 3521.89
Therefore, BD 3521.89 should be set aside now to pay for the maintenance over the nine year period.
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