Question
In: Finance
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of...
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,774.00 to install, $5,198.00 to operate per year for 7 years at which time it will be sold for $6,919.00. The second, RayCool 8, costs $41,604.00 to install, $2,063.00 to operate per year for 5 years at which time it will be sold for $9,086.00. The firm’s cost of capital is 5.80%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.
ROUND TO 2 DECIMAL PLACES. THANK YOU IN ADVANCE.
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Expert Solution
EAC or Equivalent Annual Cost is the cost of owning, maintaining and operating an asset over its entire life. it helps to evaluate investments of unequal or different lifespans.If the project or projects are not to be repeated, then the NPV (net present value) method will be more appropriate for capital budgeting decisions
EAC= NPV/ Present value annuity factor
the company will choose AC360 because its EAC is less
jeff jeffy answered 1 year agoRelated Solutions
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