A polisher costs $10,000 and will cost $20,000 a year to operate and maintain.If the discount rate is 10% and the polisher will last for 5 years,what is the equivalent annual cost of the tool?
A) $17,163
B) $22,000
C) $22,638
D)none of these

Question

Quizplus · Accepted Answer

To calculate the Equivalent Annual Cost (EAC), we need to determine the present value of the costs and then calculate the annuity that results in the same present value. Here are the steps:

1. Calculate the present value of the initial cost:
PV(initial) = -$10,000

2. Calculate the present value of the annual maintenance and operating costs:
PV(maintenance) = -$20,000 * (1 - 1/(1+0.1)^5)/0.1 = -$78,190

3. Add the present values of the costs to get the total present value:
PV(total) = PV(initial) + PV(maintenance) = -$88,190

4. Calculate the annuity that results in the same present value:
EAC = -PV(total) * 0.1/(1 - 1/(1+0.1)^5) = $22,638

Therefore, the best choice is C.

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