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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 $1,750 each year till the 12th year. What amount will the company have to put aside at 6% interest per annum compounded yearly for the maintenance?a. Around $36,200b. Around $45,800c. Around $56,100d. Around $65,300

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Answer:

C) Around $56,100

Explanation:

total maintenance costs should be:

year          cost

1           $0

2           $0

3           $0

4        $3,500

5        $5,250

6        $7,000

7        $8,750

8       $10,500

9       $12,250

10       $14,000

11       $15,750

12       $17,500

to determine the present value of the 12 year annuity we can use an excel spreadsheet and the present value function:

=PV (6%,select the 12 cells) = $56,099.39 ≈ $56,100

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