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 the nearest whole dollar.)

Question

Quizplus · Accepted Answer

To calculate the equivalent annual cost (EAC) of the tool and die machine, we need to consider both the initial cost and the operational cost. We can use the following formula:

EAC = (PMT x AF) + CapEx x (CRF - AF)

Where PMT is the annual operational cost, CapEx is the initial cost, AF is the annuity factor (present value of an annuity of $1 over 3 years at 9%), and CRF is the capital recovery factor (present value of $1 over 3 years at 9%).

Using the given values:

PMT = $10,000
CapEx = $850,000
AF = 2.531
CRF = 0.294

Plugging these values into the formula, we get:

EAC = ($10,000 x 2.531) + $850,000 x (0.294 - 2.531) = $345,797

Therefore, the equivalent annual cost of the tool and die machine is $345,797.

The best choice is C.