Question

A machine costs $270,000 and has a life of 12 years. The machine will be under total warranty for 3 years. In the 4th year the maintenance cost is estimated to be $3,500, and increases by $1,750each year till the 12th year. What amount will the company have to put aside at 6% interest per annum compounded yearly for the maintenance

Answer 1

Answer:

$56,100

Explanation:

The computation of the amount is shown below:

= Cash flow ÷ ( 1 + rate of interest)^time period

= $3,500 ÷ 1.06^4 + ($3,500 + 1 × $1,750) ÷ 1.06^5 + ($3,500 + 2 × $1,750) ÷ 1.06^6 + ($3,500 + 3 × $1,750) ÷ 1.06^7 + ($3,500 +  4 × $1,750) ÷ 1.06^8 + ($3,500 + 5 × $1,750) ÷ 1.06^9 + ($3,500 + 6 × $1,750) ÷ 1.06^10 + ($3,500 + 7 × $1,750) ÷ 1.06^11 + ($3,500 + 8 × $1,750) ÷ 1.06^12

= $56,100