Tool Makers,Inc. uses tool and die machines to produce equipment for other firms. The initial cost of one customized tool and die machine is $850,000. This machine costs $10,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 9%? (Round your answer to whole dollars.)

Question

Quizplus · Accepted Answer

To calculate the equivalent annual cost (EAC), we need to find out the annual payments that would make the present value of the machine's cost and operating expenses equal to its initial cost.

Using the following formula:

EAC = (initial cost + annual operating expenses) / [(1- (1+r)^-n)/r]

where r is the required return and n is the life of the machine in years.

Substituting the given values, we get:

EAC = (850,000 + 10,000) / [(1- (1+0.09)^-3)/0.09]
EAC = 345,796.93

Rounding the answer to the nearest whole dollar, the equivalent annual cost of the machine is $345,797.

Therefore, the best choice is (C).