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)33.33%
B)40.00%
C)66.67%
D)80.00%

Question

Quizplus · Accepted Answer

The equivalent annual cost of the tool is the sum of the annual operating and maintenance cost and the annual capital cost. The annual capital cost is the initial cost of the tool multiplied by the capital recovery factor. The capital recovery factor is a function of the discount rate and the life of the tool. In this case, the discount rate is 10 percent and the life of the tool is 5 years. The capital recovery factor is 0.2638. Therefore, the annual capital cost is $10,000 * 0.2638 = $2,638. The equivalent annual cost of the tool is $20,000 + $2,638 = $22,638.

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