A certain fluidized-bed combustion vessel has an investment cost of $88:000, a l

Question

A certain fluidized-bed combustion vessel has an investment cost of $88:000, a life of 8 years, and negligible market (resale) value. Annual costs of materials, maintenance, and electric power for the vessel are expected to total $11,000. A major relining of the combustion vessel will occur during the fifth year at a cost of $35,000. If the interest rate is 18% per year, what is the lump-sum equivalent cost of this project at the present time? The lump-sum equivalent cost of this project at the present time equals

Explanation / Answer

Equivalent annual cost of the project ($)

= 88,000 x A/P(18%, 8 years) + 11,000 + 35,000 x P/F(18%, 8 years) [Additional cost during year 5]

= 88,000 x 0.25 + 11,000 + 35,000 x 0.44

= 22,000 + 11,000 + 15,400

= 48,400

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