Question

Assume a machine costs $1,530,000 and lasts eight years before it is replaced. The operating cost is $115,000 a year. Ignore taxes. What is the equivalent annual cost if the required rate of 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 |

Answer #1

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

=1,530,000+115000/1.16+115000/1.16^2+115000/1.16^3+...............+115000/1.16^8

=1,530,000+115000[1/1.16+1/1.16^2+1/1.16^3+..................+1/1.16^8]

=1,530,000+(115000*4.343590895)

=$2,029,512.953

Equivalent annual cost=[Present value of outflows*required rate of return]/[1-(1+rate)^-time period]

=($2,029,512.953*0.16)/[1-(1.16)^-8]

=324,722.0725/0.694974543

=**$467,243.12(Approx).**

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 an equipment costs $396,000 and lasts five years before
it is replaced. The operating cost is $60,500 a year. Ignore taxes.
What is the equivalent annual cost if the required rate of return
is 12.5 percent? (Hint: Find the NPV of machine cost and annual
cost, then estimate the EAC)

A project will produce an operating cash flow of $358,000 a year
for four years. The initial cash outlay for equipment will be
$785,000. The net aftertax salvage value of $42,000 will be
received at the end of the project. The project requires $78,000 of
net working capital that will be fully recovered when the project
ends. What is the net present value of the project if the required
rate of return is 14 percent?
$237,613
$251,159
$274,300
$290,184
$309,756...

The equipment below is required for your business. Assume it
will be replaced as it wears out. The required return is 15%.
Ignore taxes. Machine: Initial cost = $200,000, Operating Cost per
year = 15,000, Life = 8 yrs. What is the equivalent annual cost
(EAC) of machine?
Select one: A. -$301,664 B. -$201,676 C. -$48,163 D. -$59,570 E.
-$22,437

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?

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

Machine A lasts 5 years and Machine B lasts 10 years. Machine A
costs $6,000 and Machine B costs $9,000. The salvage value of
Machine A is $4,000 and the salvage value of Machine B is $2,200.
Annual operation and maintenance costs are $5,000 for Machine A and
$3,900 for Machine B. Both machines can be purchased in the future
at the same price as today, and their salvage values and annual
costs will remain as they are now. Your...

Machine X has an upfront cost of $469,500 and annual operating
costs of $14,175 over its 4-year life. Machine Y costs $415,000
upfront and has annual operating costs of $6,700 over its 3-year
life. Whichever machine is purchased will continue to be replaced
at the end of its useful life. If the required return is 17.75% for
both machine, what is the absolute value of the dollar difference
between the EACs of the two machines?

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