A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10 percent and the polisher will last for 5 years, what is the equivalent annual cost of the tool?
A)$22,638
B)$85,815
C)$12,638
D)$32,638

Question

Quizplus · Accepted Answer

The equivalent annual cost (EAC) of the tool can be calculated using the formula for the present value of an annuity to find the annual cost equivalent of the initial investment, plus the annual operating and maintenance costs. The formula to calculate the EAC of the initial investment is: EAC = PV / A, where PV is the present value of the initial cost and A is the annuity factor given by [1 - (1 + r)^-n] / r, where r is the discount rate and n is the number of years. For the initial investment of $10,000, the annuity factor at a 10% discount rate over 5 years is 3.7908. So, the EAC of the initial investment is $10,000 / 3.7908 = $2,638 approximately. Adding the annual operating and maintenance costs of $20,000 gives a total EAC of $22,638.

A Polisher Costs $10,000 and Will Cost $20,000 a Year