TRINITY Ltd. produces different pieces of furniture. A set of electric drills used in the production of furniture wears out rapidly, after which the firm scraps them. Calculate the equivalent annual cost (capital costs)of a set of electric drills if the firm buys the set for $4 500 and uses it for 5 years. Assume an annual interest rate of 8%.
A)$900
B)$1 082
C)$1 127
D)$1 206
E)$1 284

Question

Quizplus · Accepted Answer

The equivalent annual cost (EAC) is calculated using the formula: EAC = (P * r) / (1 - (1 + r)^-n), where P is the initial cost, r is the interest rate, and n is the number of years. Plugging in the values: EAC = ($4,500 * 0.08) / (1 - (1 + 0.08)^-5) = $1,127.