Q1- A new production tool, with a life of 6 years, would save $2000 in production costs each year. Using a 12% interest rate, determine the highest price that could be justified for the machine. Lump the savings incurred by the machine at the end of the year and draw a cash flow diagram.

Q2- Compute the annual equivalent repair costs over a 5-year life, if a personal computer is warranted for 2 years and has an estimated repair cost of $100 annually. Assume an interest rate of 10%. Draw the cash flow diagram.

Q3- You are purchasing a new milling machine for your facility. From past experience, you estimate the future repair costs as:

Year Cost

1 $500

2 $1500

3 $2500

4 $3500

The dealer offers to sell you a four-year repair contract for $6000. You require at least a 6% interest rate on your investments. Should you invest in the repair contract?