Question

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,930.00 to install, $5,106.00 to operate per year for 7 years at which time it will be sold for $6,924.00. The second, RayCool 8, costs $41,240.00 to install, $2,200.00 to operate per year for 5 years at which time it will be sold for $9,047.00. The firm’s cost of capital is 5.28%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

Answer 1

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Answer 1
Particulars	AC360	RayCool 8	Note
Cost of Project	26,930.00	41,240.00	A
Annual O&M costs	5,106.00	2,200.00	B
Salvage Value	6,924.00	9,047.00	C
Life	7.00	5.00	D
Annuity factor at 5.28%	5.7281	4.2962	E
Present Value of Annual O&M costs	29,247.74	9,451.57	F=B*E
Present Value at 16%	0.6976	0.7732	G
Present Value of Salvage Value	4,829.88	6,994.80	H=C*G
Net Present Value	51,347.87	43,696.78	I=A+F-H
Equivalent annual cost	8,964.19	10,171.10	J=I/E
Equivalent annual cost of AC360 is less so it should be accepted.