Wrangler Western has some of its jeans stone-washed under a contract with an independent contractor, Almos Garment Corp. If Almos’ operating cost is $22,000 per year for years 1 and 2 and then it increases by 8% per year through year 10, what is the year- zero present worth of the machine operating cost at an interest rate of 10% per year?
What will be an ideal response?
Find P in year 1 for geometric gradient and add to amount in year 1; move total back to year
0.
P 1 = 22,000 + 22,000[1 – (1.08/1.10) 9 ]/(0.10 – 0.08)
= $189,450
P 0 = 189,450(P/F,10%,1)
= 189,450(0.9091)
= $172,229
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