Question

Zoysia University must purchase mowers for its landscape department. The university can buy seven EVF mowers that cost $7,800 each and have annual, year-end maintenance costs of $1,700 per mower. The EVF mowers will be replaced at the end of Year 5 and have no value at that time. Alternatively, Zoysia can buy nine AEH mowers to accomplish the same work. The AEH mowers will be replaced after seven years. They each cost $6,800 and have annual, year-end maintenance costs of $2,025 per mower. Each AEH mower will have a resale value of $900 at the end of seven years. The university’s opportunity cost of funds for this type of investment is 7 percent. Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future mowers. What is the EAC of each type of mower?

Answer 1

EVF Mowers:
AW of first cost of 7 mowers = 7800*7*(0.07*1.07^5)/(1.07^5-1) =	$   -13,316.43
Annual maintenance cost = 1700*7=	$   -11,900.00
EAC	$   -25,216.43
AEH Mowers:
AW of first cost of 9 mowers = 6800*9*(0.07*1.07^7)/(1.07^7-1) =	$   -11,355.86
Annual maintenance cost = 2025*9 =	$   -18,225.00
AW of salvage value = 900*9*(0.07)/(1.07^7-1) =	$           935.98
EAC	$   -28,644.88
As the EAC of the EVF Mowers is lower, the EVF Mowers
should be chosen.