In: Finance
You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $60,500, has a 5-year life, and has an annual OCF (after-tax) of –$10,700 per year. The Keebler CookieMunster costs $93,500, has a 7-year life, and has an annual OCF (after-tax) of –$8,700 per year. If your discount rate is 11 percent, what is each machine’s EAC?
Pillsbury 707 | Keebler CookieMunster | ||||||||
EAC | $ -27,069.49 | $ -28,542.11 | |||||||
Working: | |||||||||
Pillsbury 707 | Keebler CookieMunster | ||||||||
Costs | $ 60,500 | $ 93,500 | |||||||
Life in year | 5 | 7 | |||||||
Annual OCF | $ -10,700 | $ -8,700 | |||||||
Discount rate | 11% | ||||||||
Pillsbury 707 : | |||||||||
Present Value of annuity of 1 | = | (1-(1+0.11)^-5)/0.11 | |||||||
= | 3.6959 | ||||||||
EAC | = | (Cost /Present Value of annuity of 1)+Annual OCF | |||||||
= | (-60500/3.6959)+ | $ -10,700 | |||||||
= | $ -16,369.49 | + | $ -10,700 | ||||||
= | $ -27,069.49 | ||||||||
Keebler CookieMunster: | |||||||||
Present Value of annuity of 1 | = | (1-(1+0.11)^-7)/0.11 | |||||||
= | 4.7122 | ||||||||
EAC | = | (Cost /Present Value of annuity of 1)+Annual OCF | |||||||
= | (-93500/4.7122) | + | $ -8,700 | ||||||
= | $ -19,842.11 | + | $ -8,700 | ||||||
= | $ -28,542.11 | ||||||||