El Paso Water is planning to install wind turbines to provide enhanced evaporation of reverse osmosis concentrate from its inland desalting plant. The company will spend $1.5 million in year 1 and $2 million in year 2. Annual maintenance is expected to cost $65,000 per year through year 10. Determine the equivalent annual cost of the project in years 1 through 10 at an interest rate of 6% per year. Also, develop a single-cell spreadsheet function to display the total A value.
What will be an ideal response?
First find P in year 0, then convert to equivalent A value over 10 years; add the annual
maintenance.
In $1 million units,
P = 1.5(P/F,6%,1) + 2(P/F,6%,2)
= 1.5(0.9434) + 2(0.8900)
= $3.1591 million
A of investments = 3.1591(A/P,6%,10)
= 3.1591(0.13587)
= $434,118
Total A = 434,118 + 65,000 = $ 499,118
Spreadsheet function: = -PMT(6%,10, -PV(6%,1,,1500000) - PV(6%,2,,2000000)) +
65000
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