Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be

Question

3 years ago

10

Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be

replaced. The annual operating cost per oven is $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13 percent?
A. -$272,638
B. -$248,313
C. -$232,407
D. -$200,561
E. $196,210

Business

1 answer:

Strike441 [17] · Answer 1 · 2022-07-02T18:09:48+03:00

Answer:

A. -$272,638

Explanation:

Firstly, we need to calculate the total present value of initial investment plus all operating cost of the project. Then we will use that amount to solve for equal-amount annual operating cost.

Total present value of the project is -689,000 - 41,000/(1+13%) - 41,000/(1+13%)^2 + ... + 41,000/(1+13%)^4, or -810,953.32 (negative sign mean cost).

So, the equivalent annual cost of an oven is -272,638.

The equation solving problem can be made easily using Excel or BA II plus calculator.