The Management Service Division of a company has been asked to evaluate the following proposals for the maintenance of a new boiler with a life ofseven years:

Proposal 1. The boiler supplier will make a charge of £13,000 per year on a seven-year contract.

Proposal 2. The company will carry out its own maintenance estimated at £10,000 per annum now, rising at 5% per annum with a major overhaul at the end of year 4 costing an additional

£25,000 The discount rate is 10% and all payments are assumed to be made at year ends.

Required:
1 Calculate the maintenance cost for each year if the company provides its own maintenance.
(4 marks)
2 Calculate the present value of the cost of maintenance, if the company carries out its own maintenance. (4 marks)
3 Calculate the present value o the supplier’s maintenance contract. (3 marks)
4 Recommend, with reasons, which proposal should be adopted.