Jackson & Sons uses packing machines to prepare their product for shipping. One machine costs $136,000 and lasts about 4 years before it needs to be replaced. The operating cost per machine is $6,000 a year. Ignoring taxes, what is the equivalent annual cost of one packing machine if the required rate of return is 12%?

Question

Quizplus · Accepted Answer

The equivalent annual cost (EAC) of an asset is calculated using the formula: EAC = (Initial Cost + (Operating Cost * Number of Years)) / Present Value Annuity Factor. The Present Value Annuity Factor (PVAF) for 4 years at 12% is approximately 3.037. Thus, EAC = ($136,000 + ($6,000 * 4)) / 3.037 = $50,776.

Jackson & Sons Uses Packing Machines to Prepare Their Product