A company buys a color printer that will cost $18,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 12%?

Question

Quizplus · Accepted Answer

The equivalent annual annuity (EAA) is calculated by finding the present value of the costs and then converting it into an annuity over the life of the asset. The present value of the printer is $18,000, and the present value of the annual servicing costs is calculated using the formula for the present value of an annuity. The total present value is then converted into an annuity using the annuity formula with a 12% discount rate over 5 years, resulting in an EAA of approximately -$5493.

A Company Buys a Color Printer That Will Cost $18,000