Question

A butcher is considering two freezers for his steaks: Kool Freezer and Chill Deluxe. Kool Freezer costs $150,000 upfront and has maintenance costs of $7,000 each year for the next 7 years. Chill Deluxe costs $30,000 upfront and has maintenance costs of $24,000 each year for the next 4 years. If the discount rate is 4%, which freezer should be selected and what is its equivalent annual cost?v

Answer 1

A butcher is considering two freezers for his steaks: Kool Freezer and Chill Deluxe. Kool Freezer costs $150,000 upfront and has maintenance costs of $7,000 each year for the next 7 years. Chill Deluxe costs $30,000 upfront and has maintenance costs of $24,000 each year for the next 4 years. If the discount rate is 4%, which freezer should be selected and what is its equivalent annual cost?v

First, we will calculating the Net Present Value of Kool Freezer and Chill Deluxe:-

Year	Cash Flows of Kool Freezer($)	Cash Flows of Chill Deluxe ($)	PV Factor @4%	Present Value of Kool Freezer ($)	Present Value of Chill Deluxe ($)
0	150,000.00	30,000.00	1.0000	150,000.00	30,000.00
1	7,000.00	24,000.00	0.9615	6,730.77	23,076.92
2	7,000.00	24,000.00	0.9246	6,471.89	22,189.35
3	7,000.00	24,000.00	0.8890	6,222.97	21,335.91
4	7,000.00	24,000.00	0.8548	5,983.63	20,515.30
5	7,000.00		0.8219	5,753.49	-
6	7,000.00		0.7903	5,532.20
7	7,000.00		0.7599	5,319.42
			NPV	192,014.38	117,117.49

Equivalent Annual Cost

- Equivalent Annual Cost of Kool freezer =

= $ 31,991.44

- Equivalent Annual Cost of Chill Deluxe =

= $ 32,264.70

As Kool Freezer has low EAC than Chill deluxe. thus it should be selected.