Problem 11-7 (algorithmic) Question Help * company is considering buying a CNC m
ID: 2539307 • Letter: P
Question
Problem 11-7 (algorithmic) Question Help * company is considering buying a CNC machine In today's dollars,it is estimated that the maintenance costs for the machine (paid at the end of each year) will be $20,000 s21 000 s22 000. s25 000 and S27,000 for years 1 to 5 respectively The general inflation rate is estimated to be 3% per year and the company will receive 15% return (interest) per year on its invested funds during the inflationary period The company wants to pay for maintenance expenses in equivalent equal payments (in actual dollars) at the end of each of the five years. Find the amount of the company's payments The amount of the company's payments is sthousand (Round to one decimal place)Explanation / Answer
Formula for Discounting Rate = 1/ (1+rate) n
N= The respective year
Inflation adjusted Discount rate = (Real Rate of Return - Inflation Rate )/ (1+ Inflation Rate)
= (15% -3% )/(1+3%)
= 11.65%
Year Maintenance Costs(A) Discounting Rate @ 11.65%
(B) Present Value (A*B) 1 20000 0.8957 17913.12 2 21000 0.8022 16846.20 3 22000 0.7185 15806.89 4 25000 0.6435 16088.11 5 27000 0.5764 15562.17 Total 82216.49