Question

p25.)

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,257.00 to install, $5,170.00 to operate per year for 7 years at which time it will be sold for $7,061.00. The second, RayCool 8, costs $41,293.00 to install, $2,116.00 to operate per year for 5 years at which time it will be sold for $8,997.00. The firm’s cost of capital is 6.55%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

Answer 1

AC360
Discount rate	0.0655
Year	0	1	2	3	4	5	6	7
Cash flow stream	-26257	-5170	-5170	-5170	-5170	-5170	-5170	1891
Discounting factor	1	1.0655	1.13529	1.209652	1.288884	1.373306	1.463257	1.559101
Discounted cash flows project	-26257	-4852.18	-4553.9	-4273.96	-4011.222	-3764.64	-3533.21	1212.879
NPV = Sum of discounted cash flows
NPV AC360 =	-50033.24
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	-9138.691919
Required rate =	0.0655
Year	0	1	2	3	4	5	6	7
Cash flow stream	0	-9138.69	-9138.69	-9138.69	-9138.692	-9138.69	-9138.69	-9138.69
Discounting factor	1	1.0655	1.13529	1.209652	1.288884	1.373306	1.463257	1.559101
Discounted cash flows project	0	-8576.9	-8049.65	-7554.81	-7090.392	-6654.52	-6245.44	-5861.51
Sum of discounted future cashflows =	-50033.24
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor