What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10 percent?
A)$20,000.00
B)$21,356.95
C)$22,618.83
D)$25,237.66

Question

Quizplus · Accepted Answer

The equivalent annual cost (EAC) is calculated by finding the present value of all costs and then converting this present value into an annuity over the project's life. The present value of the $40,000 investment and the $10,000 annual expenses over 4 years at a 10% discount rate is calculated, and then this total present value is converted into an annuity over 4 years at the same discount rate, resulting in an EAC of $22,618.83.

What Is the Equivalent Annual Cost for a Project That