WSU Inc.has various options for replacing a piece of manufacturing equipment.The present value of costs for option Ell is $84,000.Option Ell has a useful life of 5 years;annual operating costs were discounted at 9%.What is the equivalent annual cost?
A)$16,800
B)$21,595.77
C)$14,035.77
D)$18,312

Question

Quizplus · Accepted Answer

To calculate the equivalent annual cost, we need to find the annuity payment that will have the same present value as the cost of option Ell.
Using the formula for present value of an annuity, we get:

PV = A[(1 - (1 / (1 + r)^n)) / r]

Where PV is the present value of the annuity, A is the annuity amount, r is the discount rate, and n is the number of periods.

Rearranging the formula to solve for A, we get:

A = PV / [(1 - (1 / (1 + r)^n)) / r]

Plugging in the given values, we get:

PV = $84,000
r = 0.09
n = 5

A = $21,595.77

Therefore, the equivalent annual cost of option Ell is $21,595.77.

Since we only have information about one option, we cannot compare it to any other options to determine the best choice. However, if we assume that the other options have the same useful life and discount rate, we can compare their equivalent annual costs to determine the best choice. The option with the lowest equivalent annual cost would be the best choice.

WSU IncHas Various Options for Replacing a Piece of Manufacturing Equipment