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You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $60,500, has a 5-year life,...

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?

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Expert Solution

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

jeff jeffy answered 3 years ago
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