A company that manufactures magnetic flow meters expects to undertake a project that will have the...

A company that manufactures magnetic flow meters expects to undertake a project that will have the cash flows estimated.

First cost, $ −820,000

Equipment replacement cost in year 2, $ −300,000

Annual operating cost, $/year −870,000

Salvage value, $ 250,000

Life, years 4

At an interest rate of 10% per year, what is the equivalent annual cost of the project? Find the AW value using tabulated factors. The equivalent annual cost of the project is $−

Expert Solution

find the AW using the equation below

AW = -820000(A/P, 10%, 4) -300000(P/F, 10%, 2)(A/P, 10%, 4) - 870000 + 250000(A/F, 10%, 4)

= -820000 x 0.31547 - 300000 x 0.82645 x 0.31547 - 870000 + 250000 x 0.21547

= -1153034

Hence the annual worth is -11530341 and the equivalent annual cost is 1153034

Rahul Sunny answered 2 years ago

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