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

To calculate the equivalent annual cost (EAC) of the machine, we need to consider the initial cost, operating cost, and salvage value of the machine, along with the required rate of return (RRR). The salvage value is the value at which the machine can be sold at the end of its life, and it is an important factor in determining the cost of the machine over its life.

The formula to calculate EAC is: EAC = (Cost + Annual operating cost - Salvage value) / Annuity factor

Cost = $136,000
Annual operating cost = $6,000
Salvage value = $0 (assuming no salvage value at the end of 4 years)
RRR = 12%
Life of the machine = 4 years

Annuity factor can be calculated using the formula: Annuity factor = (1 - (1 + RRR)^-n) / RRR

n = life of the machine = 4 years
RRR = 12%
Annuity factor = (1 - (1 + 0.12)^-4) / 0.12 = 3.03735

Now, we can calculate EAC for the machine:
EAC = ($136,000 + $6,000 - $0) / 3.03735 = $50,776

Therefore, the best choice is B with an EAC of $50,776.

Jackson & Sons Uses Packing Machines to Prepare Their Product