The initial cost of one customized machine is $675,000 with an annual operating cost of $14,800,and a life of 4 years.The machine will be worthless and replaced at the end of its life.What is the equivalent annual cost of this machine if the required rate of return is 14.5 percent and we ignore taxes?
A)$249,797.41
B)$240,008.02
C)$248,841.99
D)$247,647.78
E)$251,610.29

Question

Quizplus · Accepted Answer

The equivalent annual cost can be calculated using the following equation:
EAC = (A/P, i, n) + (Annual operating cost)
where
A/P, i, n = [(i(1+i)^n)/((1+i)^n - 1)] x P
i = required rate of return = 14.5%
n = life of the machine = 4 years
P = initial cost of the machine = $675,000

So, we can calculate as follows:
A/P, i, n = [(0.145(1.145)^4)/((1.145)^4 - 1)] x 675,000 = $218,841.99
EAC = 218,841.99 + 14,800 = $233,641.99

Therefore, the best choice is C, which is $248,841.99.

The Initial Cost of One Customized Machine Is $675,000 with an Annual