Economics Uniform Equivalent Annual Cost Question

Sep 14th, 2015
SoccerBoss
Category:
Economics
Price: $5 USD

Question description

The answer is $500,000 dollars. I am looking for the work that leads up to that. I believe you have to use present value but I'm not sure. Help is much appreciated.

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1.  An oil transfer pump that costs $1,000,000 is expected to have a 3 year life, at which time it will have to be replaced with the same pump costing the same amount.  Maintenance costs will increase each year.  The cost per year is shown in the following table (including the purchase cost at time 0).  Assume the maintenance costs occur at the end of each year and that each year is 1 year long.  Use a 13%/annum interest rate.  What is the uniform equivalent annual cost (UEAC) for the pump if we assume the UEAC occurs at the end of each year:

Year

Cost

0

1,000,000

1

50,000

2

75,000

3

96,513


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