Question

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,468.00 to install, $5,014.00 to operate per year for 7 years at which time it will be sold for $7,062.00. The second, RayCool 8, costs $41,121.00 to install, $2,143.00 to operate per year for 5 years at which time it will be sold for $9,074.00. The firm’s cost of capital is 5.40%. What is the equivalent annual cost of the AC360?

Answer Format: Currency: Round to: 2 decimal places.

Answer 1

AC360
Discount rate	5.400%
Year	0	1	2	3	4	5	6	7
Cash flow stream	-26468.000	-5014.000	-5014.000	-5014.000	-5014.000	-5014.000	-5014.000	2048.000
Discounting factor	1.000	1.054	1.111	1.171	1.234	1.301	1.371	1.445
Discounted cash flows project	-26468.000	-4757.116	-4513.393	-4282.156	-4062.767	-3854.617	-3657.132	1417.247
NPV = Sum of discounted cash flows
NPV AC360 =	-50177.93
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	-8797.87
Required rate =	5.400%
Year	0	1	2	3	4	5	6	7
Cash flow stream	0.00	-8797.87	-8797.87	-8797.87	-8797.87	-8797.87	-8797.87	-8797.87
Discounting factor	1.000	1.054	1.111	1.171	1.234	1.301	1.371	1.445
Discounted cash flows project	0.000	-8347.123	-7919.471	-7513.730	-7128.776	-6763.545	-6417.025	-6088.259
Sum of discounted future cashflows =	-50177.93
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor