Answer:
The equivalent cost of owning and operating the forklift is $4,465.82
We should replace the forklift.
Explanation:
The Equivalent annual cost can be calculated using the following formula
Equivalent annual cost = PV of cost / Annuity factor
Old forklift
PV of Cost = Annual cost x 2 years Annuity factor at 4% / 2 years Annuity factor at 4%
Hence
PV of cost = Annual cost = $5,000
New forklift
10 years Annuity factor at 4% = 1 - ( 1 + 4%)^-10 )/4% = 8.11090
PV of cost = ( Annual Cost x 10 years Annuity factor at 4% ) + Initial cost
PV of cost = ( $2,000 x 8.11090 ) + $20,000
PV of cost = 16,221.79 + $20,000
PV of cost = 36,221.79
Placing values in the formula
Equivalent annual cost = $36,221.79 / 8.11090
Equivalent annual cost = $4,465.82
As the equivalent annual cost of the new lift is lower than the the old one, we should replace the forklift
