Question

Maintenance costs for pollution control equipment on a call for an s are expected to be $180,000 now and another $70,000.03 years from now. assume that the company uses a real interest rate of 9% per year and the inflation rate average is 3% per year. What is the equivalent annual cost of the equipment?

Answer 1

Answer:

Annual cost = −64,083

Explanation:

Present maintenance costs = $180000

Maintenance costs after three years = $70000

Real interest rate = 9%

Inflation rate = 3%

Inflation adjusted interest rate, r = 0.09 + 0.03 + (0.09)(0.03)  = 12.27% per year

Annual cost = −180,000(A/P,12.27%,5) –70,000(P/F,12.27%,3)(A/P,12.27%,5)

Annual cost = −180,000(0.27927)–70,000(0.70666)(0.27927)

Annual cost = −64,083