Question

1. A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,465.00 to install, $5,151.00 to operate per year for 7 years at which time it will be sold for $6,826.00. The second, RayCool 8, costs $41,471.00 to install, $2,029.00 to operate per year for 5 years at which time it will be sold for $8,996.00. The firm’s cost of capital is 5.54%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

2. A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,471.00 to install, $5,033.00 to operate per year for 7 years at which time it will be sold for $6,865.00. The second, RayCool 8, costs $41,851.00 to install, $2,197.00 to operate per year for 5 years at which time it will be sold for $8,929.00. The firm’s cost of capital is 6.64%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

Answer 1

1) Computation of equivalent annual cost of AC 360

Equivalent annual cost = Present value of cash outflows / PVAF (i%, n years)

= [26,465 + 5,151*PVAF(5.54%,7years) - 6,826*PVF(5.54%,7th year)] / PVAF(5.54%,7years)

= [26,465 + 5,151*5.6748 - 6,826*0.6856] / 5.6748

= 51,015.98 / 5.6748

= $8,989.82

2) Computation of equivalent annual cost of Raycool 8

Equivalent annual cost = Present value of cash outflows / PVAF (i%, n years)

= [41,851 + 2,197*PVAF(6.64%,5years) - 8,929*PVF(6.64%,5th year)] / PVAF(6.64%,5years)

  = [41,851 + 2,197*4.140 - 8,929*0.7251] / 4.140

= 44,472.20 / 4.140

= $10,742.08