In: Finance
A precision lathe costs $13,500 and will cost $22,000 a year to operate and maintain. If the discount rate is 14% and the lathe will last for 5 years, what is the equivalent annual cost of the tool? (Enter your answer as positive value. Round your answer to the nearest cent. |
The equivalent annual cost $ |
Net Present Value
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 14.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
1 |
(22,000) |
0.877193 |
(19,298.25) |
2 |
(22,000) |
0.769468 |
(16,928.29) |
3 |
(22,000) |
0.674972 |
(14,849.37) |
4 |
(22,000) |
0.592080 |
(13,025.77) |
5 |
(22,000) |
0.519369 |
(11,426.11) |
TOTAL |
3.433081 |
(75,527.78) |
|
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= -$75,527.78 - $13,500
= -$89,027.78 (Negative)
Equivalent Annual Cost (EAC)
Equivalent Annual Cost (EAC) = Net Present Value / [PVIFA 14%, 5 Years]
= -$89,027.78 / 3.433081
= -$25,932.33 (Negative EAC)
Therefore, the Equivalent Annual Cost is $25,932.33 (Entered as positive value)
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.