Question

Zoysia University must purchase mowers for its landscape department. The university can buy seven EVF mowers that cost $7,500 each and have annual, year-end maintenance costs of $1,775 per mower. The EVF mowers will be replaced at the end of Year 5 and have no value at that time. Alternatively, Zoysia can buy nine AEH mowers to accomplish the same work. The AEH mowers will be replaced after eight years. They each cost $6,500 and have annual, year-end maintenance costs of $1,775 per mower. Each AEH mower will have a resale value of $700 at the end of eight years. The university’s opportunity cost of funds for this type of investment is 6 percent. Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future mowers.

What is the EAC of each type of mower? (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Answer :

EVF Mowers :

AW of first cost of 7 mowers [ 7,500 * 7 * ( 0.06 * 1.06^5 ) / ( 1.06^5 - 1 ) ]	- $12,463.31
Annual maintenance cost [ 1,775 * 7 ]	- $12,425.00
EAC	- $24,888.31

AEH Mowers :

AW of first cost of 9 mowers [ 6,500 * 9 * ( 0.06 * 1.06^8 ) / ( 1.06^8 - 1 ) ]	- $9,420.60
Annual maintenance cost [ 1,775 * 9 ]	- $15,975.00
AW of salvage value [ 700 * 9 * (0.06) / ( 1.06^8 - 1 ) ]	$636.53
EAC	- $24,759.07

As the EAC of AEH Mowers is lower, the AEH Mowers should be chosen.