Question

A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If the discount rate is 10 percent and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

Answer 1

Answer:

EAC $22,638

Explanation:

                            0               1                  2           3                4             5

Cost                    (10,000)

Cashflows                            20,000      20,000   20,000     20,000    20,000

PV factor                              1/1.1             1/1.1^2       1/1.1^3        1/1.1^4     1/1.1^5

NPV=Cashflow*PV Factor    18,182       16,529        15,026    13,660       12,418

NPV=10,000+18,182+16529+15,026+13,660+12,418)=85,815

EAC=NPV*r/1-(1+r)^-n=85,815*.1/(1-(1+.1)^-5=$22,638