Cool R US is considering purchasing a maintenance contract for its air condition

Question

Cool R US is considering purchasing a maintenance contract for its air conditioning systems. The company decides to insure the new systems using Ensure. Cool R US plans to begin the contract in year four and continue through year ten. The cost of the contract is $3,200 per year and the company's minimum attractive rate of return is 12% per year. The present worth of the contract is nearest to: a. $6,605 b. $ 10,395 c. $14,604 d. $18,081 Based on the computation from Problem 1, the equivalent uniform annual amount of the contract in years one through ten is nearest to: a. $1,840 b. $2,750 c. $3.529 d. $4,327

Explanation / Answer

(1) (b)

Present worth ($) = 3,200 x PVIFA(12%, 7)** x PVIF(12%, 3)& = 3,200 x 4.5638 x 0.7118 = 10,395

**: Years 4 to 10, both inclusive = 7 years

&: Years 1 to 3, both inclusive

(2)

EUAC ($) = 10,395 x A/P(12%, 10)** = 10,395 x 0.18 = 1,871

**A/P(R%, N years) = Capital recovery factor

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