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In: Finance

You are evaluating a new machine that has a four-year life and costs $100,000. The pretax...

You are evaluating a new machine that has a four-year life and costs $100,000. The pretax operating costs of operating the machine are $22147 per year. Use straight-line depreciation to zero over the project's life and assume a before-tax market salvage value of $20,000 at the end of four years. If your tax rate is 34 percent and your discount rate is 7 percent. What is the Equivalent Annual Cost (EAC)?

Select one:

a. $28338

b. $32667

c. $28211

d. $30118

e. $25580

Solutions

Expert Solution

The cash flows and NPV are as below

Year Cash flows Operating costs after tax Tax shield on depreciation Salvage after tax Net Cash flows
0 -100000 -100000
1 -14617.02 8500 -6117.02
2 -14617.02 8500 -6117.02
3 -14617.02 8500 -6117.02
4 -14617.02 8500 13200 7082.98
NPV -110649.42

EAC = NPV / ((1-1/(1+r)^n)/r)

=110649.49/((1-1/1.07^4)/0.07)

= $32666.82

Hence Option b is the right one.

jeff jeffy answered 1 year ago
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