Project A costs $35,000, has a 4 year life and incurs $4,000 in costs. Project B costs $39,000, has a 5 year life and incurs $4,500 in costs. Given the company's rate of return is 10%, calculate the equivalent annual cost of each project.

Question

Quizplus · Accepted Answer

The Equivalent Annual Cost (EAC) can be calculated using the formula: EAC = (Initial Cost + PV of Operating Costs) / PVIFA, where PVIFA is the Present Value Interest Factor for an Annuity. Given the information, we calculate the EAC for both projects considering their initial costs, operating costs, and the life span of each project at a 10% rate of return. The correct EAC values for Project A and Project B are $15,041 and $14,788, respectively, after applying the formula and considering the annuity factor for their respective lifespans.

Project a Costs $35,000, Has a 4 Year Life and Incurs