An environmental engineer must decide between two different liners for an evapor

Question

An environmental engineer must decide between two different liners for an evaporation pond: a plastic liner and a rubber liner. The plastic liner will cost $39,000 now and require $5,000 per year maintenance cost. After 7 years, the accumulated solids will be removed at a cost of $50,000 and the liner will then have a salvage value of $2,000. The rubber liner will cost $96,000 now, have yearly maintenance costs of $3,000, and will last indefinitely (for a very long time). The effective interest rate per month is 1%. What is the effective interest rate per year? 12.68% 12% 11.98% 13%

Explanation / Answer

Effective Annual Interest Rate ={ (1+i/n)^n} – 1

i = Stated interest Rate

n is number of compounding periods

Given I = 1% per Month = So Interest Rate per year = 12%

N = 7 Years

= {1+0.12/7)^7} – 1

= 12.635% (Approx)

So Answer is 12.68%

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