Assume a machine costs $804,000 and lasts five years before it is replaced. The operating cost...
Assume a machine costs $804,000 and lasts five years before it is replaced. The operating cost is $57,000 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 12 percent? (Hint: the EAC should account for both initial investment and annual operating costs) $246,718.72 $253,410.82 $261,533.99 $271,435.64 $280,037.42
Homework Answers
Present value of outflows=Cash outflows*Present value of discounting factor(rate%,time period)
=804,000+57,000/1.12+57,000/1.12^2+.........+57,000/1.12^5
=1,009,472.244
Hence EAC=[Present value of outflows*rate of return]/[1-(1+rate)^-time period]
=[1,009,472.244*0.12)]/[1-(1.12)^-5]
=121,136.6692/0.432573144
=280,037.42(Approx).
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