Question

The initial cost of one customized machine is $675,000 with an annual operating cost of $14,800,...

The initial cost of one customized machine is $675,000 with an annual operating cost of $14,800, and a life of 4 years. The machine will be worthless and replaced at the end of its life. What is the equivalent annual cost of this machine if the required rate of return is 14.5 percent and we ignore taxes?

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Answer #1

Present value of outflows=cash outflows*Present value of discounting factor(rate%,time period)

=675000+14800/1.145+14800/1.145^2+14800/1.145^3+14800/1.145^4

=675000+14800[1/1.145+1/1.145^2+1/1.145^3+1/1.145^4]

=675000+(14800*2.884097867)

=$717,684.6484

Hence equivalent annual cost=[Present value of outflows*Required rate]/[1-(1+rate)^-time period]

=($717,684.6484*0.145)/[1-(1.145)^-4]

=104064.274/(1-0.581805809)

=104064.274/0.418194191

=$248841.99(Approx).

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