Investment and the recurring maintenance costs

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Reference no: EM131607885

A company plans to spend $10 million buying the right to operate a commercial building. The useful life is 20 years. The company decides to spend $2 million to repair the building before use and is expected to carry out a major overhaul every 4 years, a minor repair every 2 years. For each year with an overhaul, minor repair is still needed. Each overhaul costs $0.5 million. Each minor repair costs $0.15 million. The real discount rate is 12% and the inflation rate is 5%.

Assume that the costs occur at the end of the year. Draw a cash flow diagram and calculate how much money should be prepared to ensure the investment and the recurring maintenance costs of next 20 years. Use as few time value of money factors in the formula as possible.

Reference no: EM131607885

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