Question

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

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).

Assume a machine costs $108,000 and lasts six years before it is
replaced. The operating cost is $17,200 a year. Ignore taxes. What
is the equivalent annual cost if the required rate of return is 15
percent? (Hint: the EAC should account for both initial investment
and annual operating costs)

Assume a machine costs $1,230,000 and lasts six years before it
is replaced. The operating cost is $74,500 a year. Ignore taxes.
What is the equivalent annual cost if the required rate of return
is 13 percent? (Hint: the EAC should account for both initial
investment and annual operating costs)
$382,188.48
$376,410.27
$364,294.60
$357,412.78
$301,416.83

Assume a machine costs $108,000 and lasts seven years before it
is replaced. The operating cost is $17,600 a year. Ignore taxes.
What is the equivalent annual cost if the required rate of return
is 14 percent? (Hint: the EAC should account for both initial
investment and annual operating costs)
$33,218.72
$35,610.58
$38,127.49
$42,784.78
$46,412.03

Assume a machine costs $1,530,000 and lasts eight years before
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return is 16 percent? (Hint: the EAC should account for both
initial investment and annual operating costs)
$467,243.12
$485,642.76
$509,748.77
$526,411.32
$543,577.98

Assume an equipment costs $396,000 and lasts five years before
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What is the equivalent annual cost if the required rate of return
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Office Furniture Makers, Inc. uses machines to produce high
quality office chairs for other firms. The initial cost of one
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to operate. Each machine has a life of 3 years before it is
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a.-313586
b.-285942
c.-301586
d.-326947
e.-259947

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