Question

# A factory is considering purchasing a lathe machine for the production. Each machine will cost \$80,000...

A factory is considering purchasing a lathe machine for the production. Each machine will cost \$80,000 and have an operating and maintenance cost that of \$20,000 each year. Assume the salvage value is \$20,000 at the end of 6 years and the interest rate is 9%. What is the annual equivalent cost of owning and operating each machine?

Select one:

a. 35175

b. 25000

c. 44644

d. 55000

e. 40979

f. 31370

Since no depreciation has been mentioned we assume that the entire cost is depreciated at the beginning itself. Hence, the present value of the salvage value will be:

PV of salvage value = 20000/1.09^6 = 11925.3465.

Now, we annualize the buying cost and the present value of the salvage value Let the annualized cost be A.

80000 - 11925.3465 = A/1.09 + A/1.09^2 + ... +A/1.09^6

A = 15175.19.

Hence, the total annual equivalent cost will be = 15175 + 20000 = 35175 (Option A).

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