ABC company has just purchased a life truck that has a useful life of 5 years. T
ID: 1093404 • Letter: A
Question
ABC company has just purchased a life truck that has a useful life of 5 years. The engineer estimates that maintenance costs for the truck during the first year will be $2,000. As the truck ages, maintenance costs are expected to increase at a rate of $300 per year over the remaining life. Assume that the maintenance costs occur at the end of each year. The firm wants to set up a maintenance account that earns 8% interest per year. All future maintenance expenses will be paid out of this account. How much does the firm have to deposit in the account now?
Explanation / Answer
First year maintenance cost (A1) = $1,000
Annual increase in maintenance cost (G) = $300
n = 5
i = 8%
So, Annual equal maintenance cost(A) = A1 + G(A/G, i, n)
A = 1000 + 300(A/G, 8%, 5)
= 1000 + 300(1.846)
= $1553.80
It mean the company requires $1553.80 as maintenance cost for each year.
P = A(P/A, i ,n)
=1553.80(P/A, 8%, 5)
= 1553.80(3.993)
= $6204.32
Therefore, the firm have to deposit has to deposit $6204.32 in the account now