A small company heats its building and spends $7,800 per year on natural gas or

Question

A small company heats its building and spends $7,800 per year on natural gas or this purpose. Cost increases of natural gas are expected to be 9% per year starting one year rom now e the first cash flow is at EOY one). Their maintenance on the gas furnace is $355 per year and this expense is expected to increase by 15% per year starting one year from now ie, the the EOY one the planning horizon is 15 years, what is the total annual equivalent expense for operating and maintaining the furnace? The interest rate is 18% per year. Click the icon to view the interest and annuity table for discrete compounding when 9% per year. Click the icon to view the interest and annuity table for discrete compounding when i 15% per year. Click the icon to view the interest and annuity table for discrete compounding when i 18% per year. The total annual equivalent expense for operating and maintaining the furnace is $ thousands. (Round to two decimal places.)

Explanation / Answer

Time n = 15 years

R = 18%

g1 = 9%

g2 = 15%

Present value of operating and maintenance cost = Present value of the operating cost + present value of the maintenance cost

Present value of operating and maintenance cost = (8502/(.18 -.09))*(1- (1.09/1.18)^15) + (408.25/(.18-.15))*(1- (1.15/1.18)^15)

Present value of operating and maintenance cost = $70089.82

Let, equivalent uniform annual cost = EUAC

Then,

EUAC = 70089.82/((1-1/1.18^15)/.18)

EUAC = $13765.84

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