Question

: (15 points). (Related to Checkpoint 11.2) (Equivalent annual cost calculation) Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm's new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they each cost $95,000 to purchase and install they offer very different cash flows. Alternative A has a useful life of 7 years whereas Alternative B will only last for 3 years. The after-tax cash flows from the two projects are as follows:

a. Calculate each project's equivalent annual cost (EAC) given a discount rate of 10 percent. (Round to the nearest cent.)

a. Alternative A's equivalent annual cost (EAC) at a discount rate of 10% is:	$
b. Alternative B's equivalent annual cost (EAC) at a discount rate of 10% is	$

b. Which of the alternatives do you think Barry should select? Why? (Select the best choice below.)

1. This cannot be determined from the information provided.
2. Alternative B should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative A.
3. Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B.
4. Alternative A should be selected because it has the highest NPV.  

Year Alternative A Alternative B

0 $(95000) $(95000)

1 (19000) (5000)

2 (19000) (5000)

3 (19000) (5000)

4 (19000)

5 (19000)

6 (19000)

7 (19000)

Answer 1

a. Alternative A's equivalent annual cost (EAC) at a discount rate of 10% is:	$ 38513.52
b. Alternative B's equivalent annual cost (EAC) at a discount rate of 10% is	$ 43200.91

Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B.

Workings

Year	A	B
0	-95000.00	-95000.00
1	-19000.00	-5000
2	-19000.00	-5000
3	-19000.00	-5000
4	-19000.00
5	-19000.00
6	-19000.00
7	-19000.00
NPV	-187499.96	-107434.26
	A	B
EAC	38513.52	43200.91

D- Book1 - Excel Sign in - 0 x AutoSave 01 File Home H Draw Insert Page Layout Formulas Data Review View Help X Calibri D - Tell me what you want to do E E Conditional Format as Cell Formatting Table Styles Styles 3insert 2X Delete - Format - ZY Share Comments EAY O Sort & Find & Filter Select Editing General $ -% Number Paste - 11 - AA = = = BIU - A Font Alignment - X V fix Year 3 48 Clipboard Cells B1 А с D в Year A -95000 - 19000 - 19000 -19000 -19000 - 19000 -19000 -19000 -95000 -5000 -5000 -5000 NPV =NPV(10%,C3:09)+C2 ENPV(10%,D3:09)+D2 EAC =PMT(10%,7,011) EPMT(10%,3,D11)