Question

Air conditioning for a college dormitory will cost $3.5 million to install and $100,000 per year to operate. The system should last 19 years. The real cost of capital is 5%, and the college pays no taxes. What is the equivalent annual cost? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Equivalent annual cost: $ ____

Can this be solved on a financial calculator?

Answer 1

Equivalent annual cost = Operating cost per year + [Initial Investment in AC / Present Value of annuity factor @ 5% for 19 years]
Operating cost per year = $1,00,000
Initial Investment in AC = $35,00,000
Present Value of annuity factor = [1 - (1+r)^-n]/r where r = real cost of capital = 5% and n = number of years = 19
Present Value of annuity factor = [1 - (1+0.05)^-19]/0.05
Present Value of annuity factor = 12.0853
Equivalent annual cost = $1,00,000 + [$35,00,000 / 12.0853]
Equivalent annual cost = $1,00,000 + $2,89,607.54
Equivalent annual cost = $3,89,607.54