Question

Riverside Inc. uses specialized machines to make its product. One machine costs $189,000 and lasts 7...

Riverside Inc. uses specialized machines to make its product. One machine costs $189,000 and lasts 7 years before it needs to be replaced. The annual operating cost per machine is $23,800. What is the equivalent annual annuity cost of the machine if the required rate of return is 8%?

options:

-$48,313

-$60,101

-$63,909

-$61,352

-$62,622

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Homework Answers

Answer #1

Equivalent annual annuity cost can be calculated using the formula: (NPV*r)/(1-(1+r)^-n); where r is the required rate of return and n is number of periods.

NPV for a time period of n can be calculated using the formula: -C+C1/(1+r)+C2/(1+r)^2+....Cn/(1+r)^n, where C is the investment and C1 to Cn are cash flows. On Substituting, we get -189000+(-23800/(1+8%))+(-23800/(1+8%)^2)(-23800/(1+8%)^3)(-23800/(1+8%)^4)(-23800/(1+8%)^5)(-23800/(1+8%)^6)(-23800/(1+8%)^7)= 312912.

using the formula of Equivalent annual annuity cost= (NPV*r)/(1-(1+r)^-n)= (312912*8%)/(1-(1+8%)^-7= -60101.

So, Equivalent annual annuity cost is -$60101. (Option B).

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