Question

Assume an equipment costs $396,000 and lasts five years before it is replaced. The operating cost...

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)

Homework Answers

Answer #1
Year Cash Flow Discountig Factor
[1/(1.125^period)]
PV of cash flows
(cash flow*discounting factor)
0 -396000 1 -396000
1 -60500 0.970873786 -58737.86408
2 -60500 0.942595909 -57027.0525
3 -60500 0.915141659 -55366.07039
4 -60500 0.888487048 -53753.4664
5 -60500 0.862608784 -52187.83146
NPV=
Sum of PVs
-673072.2848
NPV -673072.2848
r 0.125
n 5
EAC = [NPV*r]/[1-{(1+r)^-n}]
= [-673072.2848*0.125]/[1-{(1+0.125)^-5}]
= [-84134]/[0.44507]
= -189035.4326
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