Question:
Bonka Toys is planning to buy a robot costing $75,000. After 5 years its salvage value will be $18,000. An overhaul costing $10,000 will be needed in Year 3. Operations and Maintenance costs will be $2000 per year. What is the cash flow stream for using this robot? (Hint: cash flow stream is a set of yearly cash flows for purchasing, using, and selling this robot).
<em>Assuming an interest rate of 10%</em>
<em>Note this was added by the tutor</em>
Equivalent annual cost = $2646.41
Explanation:
The cash flow stream = Present value of cost / Annuity factor
PV of cost
PV of salvage value = 8,000× 1.1^(-4) =5464.107
PV of operating cost = 2000 × (1- 1.1^-4)/0.1 )= 6339.730
PV of overhaul costing = 10,000 × 1.1^(-3) = 7513.148
Present value (PV) of total cost:
= 6339.73 + 7513.148- 5464.10=8388.77
Annuity factor for 4 years at 10% = 3.1698
Cash flow stream = 8388.771
/3.1698
=$ 2,646.41
Equivalent annual cost = $2646.41
