Tool Makers NV 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 euros.)

Question

Quizplus · Accepted Answer

The equivalent annual cost (EAC) of the machine can be calculated using the following formula:

EAC = (initial cost + annual operating cost)/(present value factor)

Where present value factor is calculated as:

PV = (1-1/(1+r)^n)/r

r = required return rate = 9%
n = life of the machine = 3 years

Substituting the given values, we get:

PV = (1-1/(1+0.09)^3)/0.09 = 2.531

EAC = (850,000 + 10,000)/2.531 = 345,797

Therefore, the best choice is C with an EAC of €345,797.

Tool Makers NV Uses Tool and Die Machines to Produce