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You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $59,000, has a 5-year life,...

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $59,000, has a 5-year life, and has an annual OCF (after-tax) of –$10,400 per year. The Keebler CookieMunster costs $92,000, has a 7-year life, and has an annual OCF (after-tax) of –$8,400 per year. If your discount rate is 11 percent, what is each machine’s EAC

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Expert Solution

Equivalent annual cost (EAC) is computed as:

EAC = Asset price x [Discount Rate/ {1 – (1+ Discount Rate)-No. of periods}] + Annual operating cost

EAC of Pillsbury 707 = $ 59,000 x [11 %/ {1 – (1+11 %)-5}] + $ 10,400

                                     = $ 59,000 x [0.11 / {1 – (1+0.11)-5}] + $ 10,400

                                     = $ 59,000 x [0.11 / {1 – (1.11)-5}] + $ 10,400

                                     = $ 59,000 x [0.11 / {1 – (1.11)-5}] + $ 10,400

                                     = $ 59,000 x [0.11 / (1 –0.593451328)] + $ 10,400

                                     = $ 59,000 x (0.11 /0.406548672) + $ 10,400

                                     = $ 59,000 x 0.27057031+ $ 10,400

                                     = $ 15,963.65+ $ 10,400

                                      = $ 26,363.65

EAC of Keebler CookieMunster = $ 92,000 x [11 %/ {1 – (1+11 %)-7}] + $ 8,400

                                     = $ 92,000 x [0.11 / {1 – (1+0.11)-7}] + $ 8,400

                                     = $ 92,000 x [0.11 / {1 – (1.11)-7}] + $ 8,400

                                     = $ 92,000 x [0.11 / {1 – (1.11)-7}] + $ 8,400

                                     = $ 92,000 x [0.11 / (1 – 0.481658411)] + $ 8,400

                                     = $ 92,000 x (0.11 /0.518341589) + $ 8,400

                                     = $ 92,000 x 0.212215269 + $ 8,400

                                     = $ 19,523.80 + $ 8,400

                                      = $ 27,923.80

EAC of Pillsbury 707 is $ 26,363.65 and that of Keebler CookieMunster is $ 27,923.80

jeff jeffy answered 2 years ago
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