Question

What is the equivalent annual cost in years 1 through 10 of a contract that has a first cost of $79,000 in year 0 and annual costs of $17,000 in years 3 through 10? Use an interest rate of 13% per year. The equivalent annual cost is determined to be ______$ .

Answer 1

Solution:-

Present worth (PW) of costs ($) = $79,000 + 17,000 x P/A (13%, 8) x P/F (13%, 2)

                                                   = $79,000 + 19,000 x 4.7988 x 0.7831

                                                  = $79,000 + 71,400.86

                                                   = 150,400.86

Equivalent annual cost ($) = PW of costs / P/A (13%, 10)

                                           = 150,400.86 / 5.4262

                                           = $27,717.53