Question

Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10 percent? (Round your answer to whole dollars.)

Answer 1

Answer:

THe expected annual cost is $282200

Step-by-step explanation:

We should take the base cost and sum it by the anual cost multiplied by 3, because the lifetime of the machines is 3 years. Since the expected return is 10%, then we have to multiply the result by 1.1, therefore

cost = (750000+12000*3)*1.1 = $864600

Now, we divide this by 3 to obtain the annual cost

Annual cost = 864600/3 = $288200