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Assume an equipment costs $325,000 and lasts five years before it is replaced. The operating cost...

  1. Assume an equipment costs $325,000 and lasts five years before it is replaced. The operating cost is $37,800 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 14 percent? (Hint: Find the NPV of the equipment cost and annual operating cost, then solve for the EAC)

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Expert Solution

Statement showing Cash flows
Particulars Time PVF 14% Amount PV
Cash Outflows                                    -                        1.00       (325,000.00)       (325,000.00)
Cash Outflows                             1.00                  0.8772         (37,800.00)         (33,157.89)
Cash Outflows                             2.00                  0.7695         (37,800.00)         (29,085.87)
Cash Outflows                             3.00                  0.6750         (37,800.00)         (25,513.92)
Cash Outflows                             4.00                  0.5921         (37,800.00)         (22,380.63)
Cash Outflows                             5.00                  0.5194         (37,800.00)         (19,632.14)
Present value of Cash Outflows       (454,770.46)
PVF for 3 Years                  3.4331
EAC = 454,770.46/3.4331       (132,467.15)

jeff jeffy answered 10 months ago
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