A city is offering to install and operate a water pumping station to provide ser

Question

A city is offering to install and operate a water pumping station to provide service to a proposed new production facility. The station will cost $30,000 now plus it will incur $5,000 per year in operating costs for the next 3 years, all measured in real dollars. To reimburse the city, the new business must pay a fixed uniform annual fee, A, at the end of each year for 3 years to cover the construction and operating costs of the station. It is agreed that the city should receive a 6% real rate of return after taking an inflation rate of 4% into account. Determine the equivalent uniform annual cost in actual dollars to the new business.

Explanation / Answer

Equivalent Uniform Annual Cost=P( A/P,i,n) - S(A/F,i,n)

= $30,000 (A/P,6/100,3) - $5,000(A/F,6/100,3)

=     $30,000 * (0.3741) ( value taken from compound interest table)      - $5,000 (0.3141) ( value taken from compound interest table)

=$11,223 - $1,570.50

=$9652.50

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