Question

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,259.00 to install, $5,190.00 to operate per year for 7 years at which time it will be sold for $6,843.00. The second, RayCool 8, costs $41,089.00 to install, $2,059.00 to operate per year for 5 years at which time it will be sold for $9,063.00. The firm’s cost of capital is 5.22%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

Answer 1

For AC360:

Initial cost	26259
Add:Present value of operating cost	29793.30
Less:Present value of salvage value	-4792.43
Total cost today	51259.87
PVA5.22%,7	5.74052
Equivalent annual cost   [51259.87 /5.74052]	$ 8929.48

Working :

a)Present value of operating cost = PVA5.22%,7* Annual operating cost

                              = 5.74052 * 5190

                              = $ 29793.30

b)Present value of salvage value =PVF5.22%,7*Sale value

                                     = .70034 * 6843

                                     = $ 4792.43

**Find present value annuity factor and present value factor using financial calculator where i =5.22% .

or using the formula :

present value annuity factor = [1/(1+i)^1+1/(1+i)^2 + 1/(1+i)^3+........1/(1+i)^7]

Present value factor = 1/(1+i)^n