Question

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,373.00 to install, $5,025.00 to operate per year for 7 years at which time it will be sold for $6,819.00. The second, RayCool 8, costs $41,185.00 to install, $2,182.00 to operate per year for 5 years at which time it will be sold for $8,974.00. The firm’s cost of capital is 6.03%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

Answer 1

RayCool8
Discount rate	0.0603
Year	0	1	2	3	4	5
Cash flow stream	-41185	-2182	-2182	-2182	-2182	6792
Discounting factor	1	1.0603	1.124236	1.192028	1.2639068	1.34012
Discounted cash flows project	-41185	-2057.91	-1940.87	-1830.49	-1726.393	5068.201
NPV = Sum of discounted cash flows
NPV RayCool8 =	-43672.47
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	-10376.15
Required rate =	0.0603
Year	0	1	2	3	4	5
Cash flow stream	0	-10376.1	-10376.1	-10376.1	-10376.15	-10376.1
Discounting factor	1	1.0603	1.124236	1.192028	1.2639068	1.34012
Discounted cash flows project	0	-9786.05	-9229.51	-8704.62	-8209.585	-7742.7
Sum of discounted future cashflows =	-43672.47
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor