A firm decides to purchase a 3D printer at a cost of $25,000,with an estimated useful life of 10 years.The printer will require servicing at a cost of $1,500 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 8%?
A)$5,226
B)$4,000
C)$3,704
D)$1,500
E)$35,065

Question

Quizplus · Accepted Answer

The equivalent annual annuity (EAA) can be calculated using the formula for the present value of an annuity. The initial cost of the printer is $25,000, and the annual servicing cost is $1,500. These costs combined give us an annual cost that needs to be annuitized over the 10-year life of the printer at an 8% discount rate. The EAA formula is EAA = PV / [(1 - (1 + r)^-n) / r], where PV is the present value of the costs, r is the discount rate, and n is the number of periods. The present value of the annual servicing cost is calculated using the annuity formula, and then added to the initial cost to find the total present value. The EAA for this total cost gives us the annual cost equivalent, which is $5,226.

A Firm Decides to Purchase a 3D Printer at a Cost