Problem:
(a) The maintenance on a machine is expected to be $155 at the end of the first year, and increasing $35 each year for the following seven years. What present sum of money would need to be set aside now to pay the maintenance for the eight-year period? Assume 6% interest. Including a cash flow diagram.
(b) Economic analysis is useful in deciding between alternative design concepts. An engineer is trying to decide (based on economic analysis) between two otherwise equivalent machine design concepts, “X” and “Y”:
• Machine X has an initial cost of $10,000, annual maintenance costs of $500 per year, and no salvage value at the end of its four-year useful life.
• Machine Y costs $20,000. The first year there is no maintenance cost. The second year maintenance is $100, and increases $100 per year in subsequent years. The machine has an anticipated $5000 salvage value at the end of its twelve-year useful life.
If interest is 8%, which machine concept should be selected?