Problem
1. A small company heats its building and spends S7.000 per year on natural gas for this purpose. Cost increases of natural gas are expected to be 10% per year starting one year from now (i.e.. the first cash flow is $7, 700 at EOY one). Their maintenance on the gas furnace is S345 per year, and this expense is expected to increase by 15% per year starting one year from now. If the planning horizon is 16 years, what is the total annual equivalent expense for operating and maintaining the furnace? The interest rate is 16% per year.
2. An electronic device is available that will reduce this year's labor costs by $8,000. The equipment is expected to last for 10 years. Labor costs increase at a rate of 5% per year and the interest rate is 10% per year.
i. What is the maximum amount that we could justify spending for the device?
ii. What is the uniform annual equivalent value (A) of the labor costs over the eight-year period?