Question

suppose that operating costs associated with the 5-year service life of an asset start with $1 000 in the first year increasing by $500 thereafter. calculate the eac(operating) if annual rate is 10%.

Answer 1

To calculate the Equivalent Annual Cost (EAC) of the operating costs, you need to find the present value of the costs and then calculate the annuity payment. By following the provided steps, the EAC for the operating costs is approximately $373.85.

Step-by-step explanation:

To calculate the Equivalent Annual Cost (EAC) of the operating costs, we need to find the present value of the costs and then calculate the annuity payment. Here's how:

1. Convert the future operating costs to present value using the formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the annual rate, and n is the number of years. In this case, FV = $1,500 (cost in the second year) and n = 5 (service life).
2. Calculate the annuity payment using the formula: A = (PV * r) / (1 - (1 + r)^(-n)), where A is the annuity payment. In this case, PV = $1,500 (from step 1) and r = 10% (annual rate).

By following these steps, the EAC for the operating costs is approximately $373.85.