Question

A company uses packing machines to prepare its products for shipping. One machine costs –$400,000 and lasts 5 years before it needs replaced. The machine will be worthless after the 5 years. The annual after-tax cash flow per machine is –$50,000. What is the equivalent annual cost of one machine if the required rate of return is 15 percent? Negative sign used for the problem and the answers below indicates that they are costs or cash outflows.

a) -567,607.75

b)-232,392.25

c)-169,326.22

d)-197,607.75

Answer 1

Present value of outflows=Cash outflows*Present value of discounting factor(rate%,time period)

=400,000+50,000/1.15+50,000/1.15^2+50,000/1.15^3+50,000/1.15^4+50,000/1.15^5

=567607.755

Equivalent annual cost=[(Present value of outflows*Required rate of return)/[1-(1+required rate of return)^-time period]

=(567607.755*0.15)[1-(1.15)^-5]

=85141.1632/0.502823265

=-169,326.22(Approx)