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Firm A is considering the purchase of copying equipment that will require an initial investment of$15,000...

Firm A is considering the purchase of copying equipment that will require an initial investment of$15,000 and $4,000 per year in annual operating costs over the equipment’s estimated useful life of 5 years. The company will use a discount rate of 8.5%. What is the equivalent annual cost?

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Expert Solution

a Purchase Cost ($)             15,000.00
b Life of machines (years)                        5.00
c Running cost per year ($)                4,000.00
d PVAF (based on life and 8.5% discount factor)                      3.941
e Present Value of Running cost of machine (c*d)             15,762.57
f Cash outflow of machines (a+e)             30,762.57
g Equivalent Annual Cost (f/d)                7,806.49

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