Question
A new machine, with a 4-year life, has an initial cost of $1,200 and annual costs of $380. The equivalent annual cost of this machine is best described as the"
Assuming an interest rate of 10%
Note the interest rate was added by the tutor
Answer:
Equivalent Annual cost = $758.56
Explanation:
The equivalent annual cost is the present value of cost of the new machine divided by the annuity factor.
PV of annuity cost = A× 1- (1+r)^(-n)/r
A- 380, r- 10% n- 4
PV of annual cost = 380 × (1- 1.1^(-4))/0.1=1,204.55
PV of total cost = 1,204.55 + 1,200 = 2,404.55
Equivalent annual cost = PV of cost /Annuity factor
Annuity factor =(1- 1.1^(-4))/0.1 = 3.1699
Equivalent Annual cost = 2,404.55
/ 3.1699
= $758.5649
Equivalent Annual cost = $758.56
