Question

A university is setting up a fund which will allow them to upgrade all of their 180 computers over a three year period.  The first 60 computers will be replaced in 2016 at which time it is estimated that they will pay $500 per computer. The next 60 will be replaced in 2017 at an estimated cost of $470 each, and the final 60 in 2018 at an estimated cost of $440 each.   How much needs to be put into the account each year, beginning EOY 2012, to pay for these 180 computers?  Assume the annual effective interest rate for this account is 2%. Draw the cash flow diagram.

Answer 1

1. The initial cost, purchase price is recorded at the beginning of year 1 sometimes referred to as end of year 0 or EOY O Also operating and maintenance costs actually will occur during a year but they are recorded at EOY so forth. EOY = $ 500 +$470+$440 = $1410 2. CASH FLOW DIAGRAM: Present value (PV). P = F/(1+r) to the power t = 1419/(1+0.02) to the power 3 1410/1.0612 = 1328.68 Future value = P(1+r) to the power t = 1328 x(1+0.02) to the power 3 = 1328 x 1.0612 = 1409