Question

A new medical instrument costs $50,000. Operating, maintenance, and repair costs are $10,000 for the first year, $25,000 for the second year, $40,000 for the third year, and $55,000 for the fourth year. The minimum attractive rate of retum is 10%. If the medical instrument is kept for four years, the annual met equivalent cost is most nearly (A) $10,000 (B) $12,500 (C) 545,000 (D) $46,500 Given investments with the same nominal yearly interest rates, which of the following compounding periods will produce the largest effective yearly interest rates? (A) continuous (B) monthly (C) yearly (D) all are equal

Answer 1

1.

Annual equivalent cost = 50000 * (A/P, 10%,4) + 10000 + 15000 * (A/G,10%,4)

= 50000 *0.315471 + 10000 + 15000 *1.381168

= 46491.07 ~ 46500

option D is correct answer

2.

Continuous compounding gives highest effective annual interest rate for the same nominal interest rate

option A is correct answer