Country Breads uses specialized ovens to bake its bread. One oven costs $249,000 and lasts about 15 years before it needs to be replaced. The annual operating cost per oven is $34,300. What is the equivalent annual cost of an oven if the required rate of return is 14 percent?

Question

Quizplus · Accepted Answer

To find the equivalent annual cost (EAC) of an oven, we use the formula for the EAC which involves calculating the annualized cost of the capital outlay (the cost of the oven) plus the annual operating cost, all adjusted for the required rate of return. The formula for the EAC of a capital investment is: EAC = (Capital Outlay * Capital Recovery Factor) + Annual Operating Cost. The Capital Recovery Factor (CRF) is calculated using the formula: CRF = r / (1 - (1 + r)^-n), where r is the annual interest rate (or required rate of return) and n is the number of years. For this problem, r = 14% or 0.14, and n = 15 years. Plugging these values into the CRF formula gives us a CRF value, which is then used to calculate the EAC. The correct calculation leads to an EAC of −$74,839.43, making choice A the correct answer.

Country Breads Uses Specialized Ovens to Bake Its Bread