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Air conditioning for a college dormitory will cost $2.8 million to install and $135,000 per year...

Air conditioning for a college dormitory will cost $2.8 million to install and $135,000 per year to operate at current prices. The system should last 12 years. The real cost of capital is 8%, and the college pays no taxes. What is the equivalent annual cost? (Enter your answer in dollars not in millions and round your answer to 2 decimal places.)

Equivalent annual cost

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Expert Solution

First, we will calculate the Net Present value of cash outflows:

Year Cash Flows ($) PV Factor @8.00% Present Value ($)
0         2,800,000.00 1.0000               2,800,000.00
1             135,000.00 0.9259                   125,000.00
2             135,000.00 0.8573                   115,740.74
3             135,000.00 0.7938                   107,167.35
4             135,000.00 0.7350                     99,229.03
5             135,000.00 0.6806                     91,878.73
6             135,000.00 0.6302                     85,072.90
7             135,000.00 0.5835                     78,771.20
8             135,000.00 0.5403                     72,936.30
9             135,000.00 0.5002                     67,533.61
10             135,000.00 0.4632                     62,531.12
11             135,000.00 0.4289                     57,899.19
12             135,000.00 0.3971                     53,610.36
NPV               3,817,370.53

Calculating Equivalent annual cost using the formula:

Where, NPV = $3817,370.53

r = Cost of Capital = 8%

n = no of years = 12

EAC = $ 506546.05

So, Equivalent Annual Cost = $ 506,546.05

jeff jeffy answered 1 year ago
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