Photo Co. needs to purchase a photocopying machine. It wants to calculate the EAC of the...

Photo Co. needs to purchase a photocopying machine. It wants to calculate the EAC of the following machine. The machine has an initial cost of $18,000 and useful life of three years. Its maintenance cost is $2,000 a year. The expected salvage value is $600. Straight line depreciation method including salvage value for depreciation calculation will be employed. The photocopying machine will be replaced indefinitely and it requires no additional working capital. The appropriate discount rate is 12% and tax rate is 15%.

Solutions

Expert Solution

Solution :

The EAC of the photocopying machine is = - $ 8,173.14

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

Note :

The formula for calculation of the annual depreciation as per straight line method of depreciation is

Annual depreciation = ( Cost of the Machine – Expected Salvage value ) / No. of years of useful life

As per the information given in the question we have

Cost of the asset = $ 18,000 ; Salvage value = $ 600 ; No. of years of useful life = 3 years

Applying the above information in the formula we have

= ( $ 18,000 - $ 600 ) / 3

= $ 17,400 / 3 = $ 5,800

Thus the Annual depreciation as per the straight line method is = $ 5,800

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 1 year ago

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