Question

Acme has invested in a machine to enhance the worker's productivity and job enrichment. The company purchased the machine for $92,529 that has an expected useful life of 13 years and a salvage value of $18,470. If the operation and maintenance costs are estimated to be $4,520 per year over the machine's life, and assuming an interest rate of 0.11 per year, the annual equivalent cost of owning the machine is most nearly.

Answer 1

Answer: We will apply the following formula for finding the annual equivalent cost of owning the machine =

Annual Equivalent Cost of Owning the Machine = (P – F) (A/P, i, N) + F* i + A

Where

and,

(A/P, i, N) = (A/P, 11%, 6) = Capital Recovery Factor =

=

= 0.4272 / 2.8833

= 0.1482

(Note: It's advisable to use a scientific calculator or one may directly derive the value of capital recovery factor table)

Hence, by replacing the appropriate values in the formula of Annual Equivalent Cost of Owning the Machine, we get

=(92529 – 18470) (0.1482) + (18470* 0.11) + 4520

= 10975.5438 + 2031.70 + 4520

= 17527.2438 $ (Rounded to 4 decimal places)