Jackson & Sons uses packing machines to prepare its products for shipping. One machine costs $136,000 and lasts about 4 years before it needs replaced. The operating cost per machine is $6,000 a year. What is the equivalent annual cost of one packing machine if the required rate of return is 12%? (Round your answer to whole dollars.)

Question

Quizplus · Accepted Answer

To calculate the equivalent annual cost, we need to consider both the initial cost and the annual operating cost, and bring it to an equivalent annual cost at a given required rate of return. Using the formula, EAC = (A/P, i, n) + Annual Operating Cost, where A is the initial cost, P is the present value factor, i is the required rate of return, and n is the number of years, we get:

EAC = (136,000/3.0375) + 6,000
EAC = 44,760 + 6,000
EAC = 50,760

Rounding to the nearest whole dollar, the equivalent annual cost of one packing machine is $50,776.

Therefore, the best choice is B.

Jackson & Sons Uses Packing Machines to Prepare Its Products