Question

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,225.00 to install, $5,116.00 to operate per year for 7 years at which time it will be sold for $7,059.00. The second, RayCool 8, costs $41,570.00 to install, $2,133.00 to operate per year for 5 years at which time it will be sold for $8,964.00. The firm’s cost of capital is 5.32%. What is the equivalent annual cost of the AC360?

Answer 1

We first compute the NPV using excel NPV function.

Thereafter the EAC is computed using PMT function

Hence the cash flow and EAC are as below

Year	AC360	RayCool 8
0	-26225	-41570
1	-5116	-2133
2.00	-5116	-2133
3	-5116	-2133
4	-5116	-2133
5	-5116	6831
6	-5116
7	1943
NPV	($50,576.85)	($43,806.18)
EAC	$8,842.32	$10,207.79

WORKINGS