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).