Equipment maintenance costs for manufacturing explosion-proof pressure switches are projected to be $125,000 in year 1 and increase by 3% each year through year 5. What is the equivalent annual worth of the maintenance costs at an interest rate of 10% per year, compounded semiannually? Solve using (a) the factor formula and (b) a spreadsheet.
What will be an ideal response?
PP = year; CP = 6 months; use effective annual i
(a) i a = (1 + 0.10/2) 2 – 1 = 0.1025 (10.25% per year)
P g = 125,000{1 – [(1 + 0.03)/(1 + 0.1025)] 5 }/(0.1025 – 0.03)
= 125,000(3.9766)
= $497,080
A = 497,080(A/P,10.25%,5)
= 497,080(0.26548)
= $131,965
(b) Use the NPV and PMT functions at 10.25%
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