Assume a machine costs $404,000 and lasts four years before it is replaced. The operating cost...

Assume a machine costs $404,000 and lasts four years before it is replaced. The operating cost is $47,000 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 12.5 percent? (Hint: the EAC should account for both initial investment and annual operating costs)

		$163,297
		$174,825
		$181,414
		$195,637
		$202,118

Expert Solution

Calculation of EAC
Particulars	Time	PVF @12.5%	Amount	PV
Cash Outflows	-	1.00	4,04,000.00	4,04,000.00
Cash Outflows	1.00	0.8889	47,000.00	41,777.78
Cash Outflows	2.00	0.7901	47,000.00	37,135.80
Cash Outflows	3.00	0.7023	47,000.00	33,009.60
Cash Outflows	4.00	0.6243	47,000.00	29,341.87
Present value of Cash Outflows				5,45,265.05
PVF for 4 Years				3.0056
EAC				1,81,414.37
So corrct answeris $181414

jeff jeffy answered 3 months ago

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