Question

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,708.00 to install, $5,045.00 to operate per year for 7 years at which time it will be sold for $7,180.00. The second, RayCool 8, costs $41,711.00 to install, $2,042.00 to operate per year for 5 years at which time it will be sold for $9,069.00. The firm’s cost of capital is 5.34%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

Can you show me how you solved even if it was done in excel. Thanks!

Answer 1

Year	Initial cost (A)	Annual operation costs (B)	Salvage value (C)	Total cash flows (D)=(A)+(B)+(C)	PVF @ 5.34% (E)	Present value of cash outflows (D)*(E)
0	26,708	-	-	26,708	1	26,708.00
1	-	5,045	-	5,045	0.9493	4,789.25
2	-	5,045	-	5,045	0.9012	4,546.47
3	-	5,045	-	5,045	0.8555	4,316.00
4	-	5,045	-	5,045	0.8121	4,097.21
5	-	5,045	-	5,045	0.7710	3,889.51
6	-	5,045	-	5,045	0.7319	3,692.34
7		5,045	(7,180)	(2,135)	0.6948	(1,483.35)
Total present value of cash outflows (x)	50,555.42
Present value factor annuity (5.34%, 7 years) (y)	5.72
Equivalent annual cost of AC360 [(x)/(y)]	8,844.94

Hence, the equivalent annual cost of AC360 is $8,844.94.