Question

Zoysia University must purchase mowers for its landscape department. The university can buy four EVF mowers that cost $7,600 each and have annual, year-end maintenance costs of $1,675 per mower. The EVF mowers will be replaced at the end of Year 4 and have no value at that time. Alternatively, Zoysia can buy six AEH mowers to accomplish the same work. The AEH mowers will be replaced after seven years. They each cost $6,600 and have annual, year-end maintenance costs of $1,875 per mower. Each AEH mower will have a resale value of $800 at the end of seven years. The university’s opportunity cost of funds for this type of investment is 9 percent. Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future mowers. What is the EAC of each type of mower? (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Model	EVF movers
Cost per mover	$7,600
No of movers required	4
The cost of acquisition	$30,400
Life of the assets	4
Resale vaulue at the end	$0
Annual Maintenance cost	$      6,700.00
Discount rate	9%
Annuity PV factor	=( 1- (1.09)^-4)/0.09   =		3.23972
Calculation of NPV and Equivalent Annual Cost
Particular	Year-0	Year - 1	Year - 2	Year - 3	Year - 4	Total PV of cash flow
present vaue of cost of Asset	$   30,400.00	0	0	0	0	$   30,400.00
PV of Maintenance cost	$                   -	6146.78899	5639.256	5173.629	4746.449	$   21,706.12
Salvage value	$                   -	0	0	0	0	$                   -
NPV of EVF movers						$ (52,106.12)
EAC = NPV/Annuity PV factor
Equivalent Annual Cost	$ (16,083.53)

Model	AEH movers
Cost per mover	$6,600
No of movers required	6
The cost of acquisition	$39,600
Life of the assets	7
Resale vaulue at the end	$4,800
Annual Maintenance cost	$   11,250.00
Discount rate	9%
Annuity PV factor	=( 1- (1.09)^-7)/0.09   =		5.032953
Calculation of NPV and Equivalent Annual Cost
Particular	Year-0	Year - 1	Year - 2	Year - 3	Year - 4	Year - 5	Year - 6	Year - 7	Total PV of cash flow
present vaue of cost of Asset	$39,600	0	0	0	0	0	0	0	$39,600
PV of Maintenance cost	$                   -	10321.1009	9468.9	8687.064	7969.784	7311.728096	6708.007	6154.135	$56,621
PV of Salvage value	$                   -	$                 -	$           -	$           -	$           -	$                   -	$           -	2625.764	$2,626
NPV of AEH movers									$          (93,594.96)
EAC = NPV/Annuity PV factor
Equivalent Annual Cost	$ (18,596.43)