Question

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,192.00 to install, $5,133.00 to operate per year for 7 years at which time it will be sold for $7,113.00. The second, RayCool 8, costs $41,856.00 to install, $2,172.00 to operate per year for 5 years at which time it will be sold for $9,076.00. The firm’s cost of capital is 6.09%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

Answer 1

AC360
Discount rate	0.0609
Year	0	1	2	3	4	5	6	7
Cash flow stream	-26192	-5133	-5133	-5133	-5133	-5133	-5133	1980
Discounting factor	1	1.0609	1.125509	1.194052	1.2667701	1.343916	1.425761	1.51259
Discounted cash flows project	-26192	-4838.34	-4560.6	-4298.81	-4052.038	-3819.43	-3600.18	1309.013
NPV = Sum of discounted cash flows
NPV AC360 =	-50052.4
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	-8994.84
Required rate =	0.0609
Year	0	1	2	3	4	5	6	7
Cash flow stream	0	-8994.84	-8994.84	-8994.84	-8994.84	-8994.84	-8994.84	-8994.84
Discounting factor	1	1.0609	1.125509	1.194052	1.2667701	1.343916	1.425761	1.51259
Discounted cash flows project	0	-8478.5	-7991.8	-7533.04	-7100.61	-6693.01	-6308.8	-5946.65
Sum of discounted future cashflows =	-50052.4
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor