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Question: please use formulas for series repeated cash flows and arithmetic...

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Please use formulas for Series (repeated) Cash Flows and Arithmetic Gradient Series Cash Flows, and draw cash flow diagrams as applicable.

Your company has bought a new machine which is covered by a manufacturer's warranty for the first year. The expected future repair costs are shown below. For simplicity, assume that costs are paid at the end of the year in which they are incurred.

Year 1 2 3 4 5

Repair cost 0 500 1000 1500 2000

The seller is offering a 5-year extended service contract covering all repairs for an annual price of $960 starting at the end of year 1 and payable yearly until the end of year 5. Would you advise your boss to buy the service contract or not? Assume the interest rate is 7% per year.

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