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

The equivalent annual cost (EAC) is calculated by converting the initial investment and operating costs into an annualized cost using the discount rate. The formula for EAC is: EAC = (Initial Investment / Annuity Factor) + Annual Operating Costs. The annuity factor for 5 years at 8.5% is approximately 3.993. Therefore, EAC = ($15,000 / 3.993) + $4,000 = $7,806.49.