A company buys a piece of equipment for €2 million on January 1. The expected useful life is 6 years and the salvage value is estimated zero. The company intends to replace the equipment identically. The average expected price increase is 8% yearly. For this purpose, the company creates a special fund with annual equal payments at the end of each year during the lifetime. Cost of

A company buys a piece of equipment for €2 million on January 1. The expected useful life is 6 years and the salvage value is estimated zero. The company intends to replace the equipment identically. The average expected price increase is 8% yearly. For this purpose, the company creates a special fund with annual equal payments at the end of each year during the lifetime. Cost of

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A company buys a piece of equipment for €2 million on January 1. The expected useful life is
6 years and the salvage value is estimated zero. The company intends to replace the
equipment identically. The average expected price increase is 8% yearly. For this purpose, the
company creates a special fund with annual equal payments at the end of each year during the
lifetime. Cost of capital and earnings of the fund (i) is 10% per year. Compute the annual
payment into the fund.

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