The initial cost of a machine is $750,000. This machine costs $12,000 a year to operate...
The initial cost of a machine is $750,000. This machine costs
$12,000 a year to operate and has a life of 3 years before it is
replaced. What is the equivalent annual cost of this machine if the
required return is 10%?
options: -$301,586
-$313,586
-$259,947
-$326,947
-$285,942
Homework Answers
Annuity factor = [1 - 1 / (1 + r)^n] / r
Annuity factor = [1 - 1 / (1 + 0.1)^3] / 0.1
Annuity factor = [1 - 0.751315] / 0.1
Annuity factor = 2.486852
Equivalent annuity cost = (Initial investment / annuity factor) + maintenance cost
Equivalent annuity cost = (750,000 / 2.486852) + 12,000
Equivalent annuity cost = 313,586
Since these are outflows, it will have a negative sign
Equivalent annuity cost = -$313,586
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