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Alona [7]
3 years ago
14

Consider a palletizer at a bottling plant that has a fi rst cost of $150,000, operating and maintenance costs of $17,500 per yea

r, and an estimated net salvage value of $25,000 at the end of 30 years. Assume an interest rate of 8 percent. What is the annual equivalent cost of the investment if the planning horizon is 30 years?
Business
1 answer:
pshichka [43]3 years ago
6 0

Answer:

Annual equivalent cost of the investment = $30,603.43 per annum

Explanation:

<em>Equivalent Annual cost is the Present Value of the total cost over the investment period divided by the appropriate annuity factor.</em>

<em>Step 1 </em>

<em>PV of cash flows</em>

PV of first cost =  150,000

<em>PV of annual maintenance cost of $17,500</em>

= 17,500× (1-(1+0.08)^(-30))/0.08

= 197,011.21

<em>PV of salvage value</em>

$25,000 × (1+0.08)^(-30)

= 2,484.43

<em>PV of net total cost </em>

= 197,011.21  +150,000 - 2,484.43

=  344,526.78

Step 2

<em>Determine the annuity factor for 30 years at 8%</em>

(1-(1+0.08)^(-30))/0.08

=11.2577

Step 3

<em>Equivalent annual cost</em>

= 344,526.78 / 11.2577

<em> =$30,603.43</em>

Annual equivalent cost of the investment = $30,603.43 per annum

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