My teacher gave us this problem, and i\'m having a hard timeunderstanding it. Co

Question

My teacher gave us this problem, and i'm having a hard timeunderstanding it. Could i get some help with it? thanks!

A machine at a cost of $5,000 was purchased 3 years ago. It can besold now for $3,000. If the machine is kept, the annual operatingand maintenance costs will be $1,500. If it kept and operated forthe next five years, determine the amount at time 0 (now)equivalent to the cost of owning and operting the machine for thenext five-year period. It is anticipated that the machine can besold for $,1000 at the end of the five year period. Use an interestrate of 10%.

Explanation / Answer

                          0     1 2   3   4 5 Annual operatingcosts          -1500 -1500 -1500 -1500 -1500 Resalevalue                                            1000 Total                           -1500 -1500 -1500 -1500 -500 NPV = -1500/1.1 - 1500/(1.1^2) - 1500/(1.1^3) - 1500/(1.1^4) -500/(1.1^5) = -5065

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