Question

Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $97,000, has a 4 year life, and costs $8,900 per year to operate. The relevant discount rate is 12 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $19,500 at the end of the project’s life. The relevant tax rate is 38 percent. All cash flows occur at the end of the year. What is the equivalent annual cost (EAC) of this equipment? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

EAC

$

Answer 1

Year		Cost	Discount factor @ 12%
0	Equipment cost	-97000.00	1	-97000.00
	operating cost	-8900.00
	Depreciation	-24250.00
	Net cost	-33150.00
	Tax saving @ 38%	12597.00
	Add non cash Depreciation	24250.00
1-4	Net Cash flow	3697.00	3.037349	11,229.08
4	Salvage value Net of tax (1-38%)	12090.00	0.635518	7,683.41
	Net Present value			(78,087.51)
	EAC (NPV/Discount factor@12% for 4 yeas)		3.037349	(25,709.10)

Equivalent annual cost (or EAC) is the cost per year of owning, operating, and maintaining an asset over its lifetime.

Discount factor per year = 1/(1+r)^t. Cummulative is addition of 4 years discount factor or (1 - (1 + r) ^-t ) / r