Warchester Inc.is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4000 per year in annual operating costs over the equipment's estimated useful life of five years.The company will use a discount rate of 8.5%.What is the equivalent annual cost?

Question

Quizplus · Accepted Answer

We can use the formula for Equivalent Annual Cost (EAC):

EAC = (A/P, i, n) + annual operating costs

where:
A = initial investment
i = discount rate
n = useful life

Plugging in the given values, we get:

EAC = (15,000/3.889) + 4,000
EAC = 3,856.07 + 4,000
EAC = 7,856.07

Rounding off to the nearest cent, the equivalent annual cost is $7,806.49, which is choice A.