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In: Finance

A company is planning on buying a new machine costing $118,000 and belonging in a 30%...

A company is planning on buying a new machine costing $118,000 and belonging in a 30% CCA class. The machine has projected maintenance costs of $16,000 annually over its three-year life. At the end of the three years, the machine will be worthless and will be scrapped. The company has a 34% tax rate and a 16% discount rate. What is the equivalent annual cost of the machine?
options: $68,540
$47,892
$52,254
$36,520
$55,333
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Solutions

Expert Solution

Answer $ 68540

Cost of System         118,000.000
Initial outlay         118,000.000
Add PV of annual operating cost(see note)           35,934.240
Less Present value of salvage value                             -  
Total         153,934.240
PVAF(16%3) =                   2.2459
EAC ( Total/PVAF)             68,540.42
NOTE: PV of annual operating cost 16000*PVAF(16%,3)
          35,934.240
PVAF(16%,3) = 1/1.16^1 + 1/1.16^2 + ….1/1.16^3
2.24589

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