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New equipment is purchased for $40,000. It has a residual value of at the end of...

New equipment is purchased for $40,000. It has a residual value of at the end of the 10 years $2,500.00. Desired rate of return 12%. Operating expenses are expected to be $2000.00 the first year and increase by $500.00 each year during the life of the equipment. Is this a good investment assuming equivalent annual methods.

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Solution:-

Equivalent Annual Operating Cost = A1 + G (A/G, i, N)

                                                        = 2000 + 500 (A/G, 12%, 10 years)

                                                        = 2000 + 500 (3.585)

                                                        = 2000 + 1,792.5

                                                        = 3,792.5

Annual Total Cost = 40,000 (A/P, 12%, 10 Years) + 3792.5

                              = 40,000 (0.1770) + 3792.5

                              = 7080 + 3792.5

                              = $10,872.5

Rahul Sunny answered 3 months ago
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