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Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $104,000, has a...
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $104,000, has a 5-year life, and costs $8,900 per year to operate. The relevant discount rate is 10 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $7,900 at the end of the project’s life. The relevant tax rate is 22 percent. All cash flows occur at the end of the year.
What is the equivalent annual cost (EAC) of this equipment? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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Expert Solution
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | |
| Cost of new machine | -104000 | ||||||
| =Initial Investment outlay | -104000 | ||||||
| Sales | 0 | 0 | 0 | 0 | 0 | ||
| Profits | Sales-variable cost | -8900 | -8900 | -8900 | -8900 | -8900 | |
| -Depreciation | Cost of equipment/no. of years | -20800 | -20800 | -20800 | -20800 | -20800 | |
| =Pretax cash flows | -29700 | -29700 | -29700 | -29700 | -29700 | ||
| -taxes | =(Pretax cash flows)*(1-tax) | -23166 | -23166 | -23166 | -23166 | -23166 | |
| +Depreciation | 20800 | 20800 | 20800 | 20800 | 20800 | ||
| =after tax operating cash flow | -2366 | -2366 | -2366 | -2366 | -2366 | ||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 6162 | |||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||
| =Terminal year after tax cash flows | 6162 | ||||||
| Total Cash flow for the period | -104000 | -2366 | -2366 | -2366 | -2366 | 3796 | |
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 |
| Discounted CF= | Cashflow/discount factor | -104000 | -2150.90909 | -1955.372 | -1777.611 | -1616.01 | 2357.0173 |
| NPV= | Sum of discounted CF= | -109142.8843 | |||||
| EAC | -28791.61793 | ||||||
| Year or period | 0 | 1 | 2 | 3 | 4 | 5 | |
| EAC | -28791.6179 | -28791.62 | -28791.62 | -28791.62 | -28791.62 | ||
| Discount factor= | (1+discount rate)^corresponding period | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 | |
| Discounted CF= | Cashflow/discount factor | -26174.1981 | -23794.73 | -21631.57 | -19665.06 | -17877.33 | |
| NPV= | -109142.8843 | ||||||
| EAC is equivalent yearly CF with same NPV = | -28791.62 | ||||||
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