Warchester Inc. is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years. The company will use a discount rate of 8.5%. What is the equivalent annual cost?

Question

Quizplus · Accepted Answer

To calculate the equivalent annual cost, we use the formula:

EAC = (initial investment + annual operating costs) x annuity factor

Annuity factor = (r x (1 + r)^n) / ((1 + r)^n - 1), where r is the discount rate and n is the number of years.

In this case, initial investment = $15,000, annual operating costs = $4,000, discount rate = 8.5%, and n = 5.

Annuity factor = (0.085 x (1 + 0.085)^5) / ((1 + 0.085)^5 - 1) = 2.7232

EAC = ($15,000 + $4,000) x 2.7232 = $41,032.97

Dividing this by the number of years (5), we get the equivalent annual cost:

EAC = $41,032.97 / 5 = $7,806.49

Therefore, the best choice is (A) with the equivalent annual cost of $7,806.49.