Gamma Electronics is considering the purchase of testing equipment that will cost $500,000.The equipment has a 5-year lifetime with no salvage value.Assume the new machine will generate after-tax savings of $100,000 per year for the five years.
If the firm has a 15% cost of capital,what is the equivalent annual cost of the equipment?

Question

Quizplus · Accepted Answer

NPV = -500,000 + 100,000/1.15 + 100,000/1.15² + 100,000/1.15³+ 100,000/1.15⁴+ 100,000/1.15⁵= -164,784 Suppose the equivalent annual cost is x,then x/1.15 + x/1.15² + x/1.15³+ x/1.15⁴+ x/1.15⁵= -164,784 x = -49,158

Gamma Electronics Is Considering the Purchase of Testing Equipment That