Question

1A.The equivalent annual cost for a machine that requires a $100,000 investment at time-period zero, and a $10,000 annual expense each of the next 5 years, if the opportunity cost of capital is 10%, is $ 1B.The EAC for a machine that requires a $100,000 investment at time zero, a $10,000 annual expense each of the next 5 years, but has a $10,000 net cost recovery in 5 years, if the opportunity cost of capital is 10%, is

Answer 1

Equivalent Annual Cost = Asset Price × (r / (1 − (1 + r)^-n)+ Annual Maintenance Cost

Ans 1A.

EAC = $1,00,000 * (.10/(1-(1+.10)^5) + $10,000 = $ 36,379.75

Ans 1B. With net recovery of $10,000 in 5 years, assuming receiving $10,000 at the end of 5th year.

(Asset Price - Recovery ) × (r / (1 − (1 + r)^-n)+ Annual Maintenance Cost + Recovery *r

EAC = ($1,00,000 - $10,000 ) * (.10/(1-(1+.10)^5) + $10,000 + 10000*.10 = $34,741.78