A small company heats its building and will spend $9,592 in year 1 on natural gas for this purpose. Cost increases of natural gas are expected to be 9% per year starting year 2. Their maintenance on the gas furnace is going to be $408.25 in the first year and this expense is expected to increase by 15% per year starting year 2. If the planning horizon is 15 years, what is the total annual equivalent expense for operating and maintaining the furnace? The interest rate is 18% per year. (Round to nearest dollar) (a) The total present worth of operating and maintaining the furnace is $ (b) The total annual equivalent expense for operating and maintaining the furnace is $ (Round to nearest dollar)
A small company heats its building and will spend $9,592 in year 1 on natural gas for this purpose. Cost increases of natural gas are expected to be 9% per year starting year 2. Their maintenance on the gas furnace is going to be $408.25 in the first year and this expense is expected to increase by 15% per year starting year 2. If the planning horizon is 15 years, what is the total annual equivalent expense for operating and maintaining the furnace? The interest rate is 18% per year. (Round to nearest dollar) (a) The total present worth of operating and maintaining the furnace is $ (b) The total annual equivalent expense for operating and maintaining the furnace is $ (Round to nearest dollar)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A small company heats its building and will spend $9,592 in year 1 on natural gas for this purpose. Cost increases of
natural gas are expected to be 9% per year starting year 2. Their maintenance on the gas furnace is going to be
$408.25 in the first year and this expense is expected to increase by 15% per year starting year 2. If the planning
horizon is 15 years, what is the total annual equivalent expense for operating and maintaining the furnace? The interest
rate is 18% per year.
(Round to nearest dollar)
(a) The total present worth of operating and maintaining the furnace is $
(b) The total annual equivalent expense for operating and maintaining the furnace is $
(Round to nearest dollar)
Expert Solution
Step 1
Given
Cost of natural gas in year 1 = $9592
The annual increment in the cost of natural gas is 9%
The maintenance cost on the gas furnace in year 1 = $408.25
The annual increment in maintenance cost on the gas furnace is 15%
The rate of interest is 18% per year.
Formula to find the present value of the geometric gradient series is
Here i is the interest rate and g is the gradient.
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