Question

Your company is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $40,000 and should last four years. The lesser quality printer costs $30,000 and should last three years. If the cost of capital for the company is 13 percent, then what is the equivalent annual cost for the best choice for the company? Round to the nearest dollar. a. $10,000, short-term vehicle b. $13,448, long-term vehicle c. $12,706, short-term vehicle d. $10,000, either vehicle

Answer 1

Calculation of EAC of High-quality printer

PV = Cost of high quality printer = $40,000

n = 4 years

r = cost of capital = 13%

EAC of high-quality printer = [r*PV] / [1 - (1+r)^-n]

= [13% * $40,000] / [1 - (1+13%)^-4]

= $5,200 / 0.386681272

= $13,447.7679

Calculation of EAC of Lesser-quality printer

PV = Cost of lesser quality printer = $30,000

n = 3 years

r = cost of capital = 13%

EAC of high-quality printer = [r*PV] / [1 - (1+r)^-n]

= [13% * $30,000] / [1 - (1+13%)^-3]

= $3,900 / 0.306949838

= $12,705.6591

EAC of lesser quality printer is less than high quality printer

Therefore, $12,706, short term vehicle

Option c is correct