Question

Air conditioning for a college dormitory will cost $2.3 million to install and $160,000 per year to operate. The system should last 17 years. The real cost of capital is 7%, and the college pays no taxes. What is the equivalent annual cost? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Equivalent annual cost            $

$75577.94 is incorrect!!!!

Answer 1

Equivalent Annual Cost (EAC)

Step-1, Calculation of Net Present Value (NPV)

Net Present Value (NPV) = Present Value of annual cash flows – Initial Investment cost

= -$160,000(PVIFA 7%, 17 Years) - $2,300,000

= [-$160,000 x 9.763223] - $2,300,000

= -$1,562,115.68 - $2,300,000

= -$3,862,115.68 (Negative NPV)

Step-2, Calculation of Equivalent Annual Cost (EAC)

Equivalent Annual Cost (EAC) = Net Present Value / (PVIFA 7%, 17 Years)

= -$3,862,115.68 / 9.763223

= -$395,577.94 (Negative)

“Therefore, the Equivalent Annual Cost (EAC) will be -$395,577.94 (Negative)”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.