Final answer:
To find the equivalent annual cost (capital costs) of a set of electric drills, divide the purchase price of $4,500 by the annuity factor for 5 years at 8% interest, which gives an equivalent annual cost of approximately $1,127.
Step-by-step explanation:
To calculate the equivalent annual cost (capital costs) of a set of electric drills for Trinity Ltd., we use the formula for the present value of an annuity. Given that the firm buys the set for $4,500 and uses it for 5 years, with an annual interest rate of 8%, we must find the annuity payment that has the same present value as the purchase price. This payment is the equivalent annual cost. Using a financial calculator or present value tables, we can determine the annuity factor for 5 years at 8%, which is approximately 3.993. To find the equivalent annual cost, divide the purchase price by the annuity factor:
$$ \frac{\$4,500}{3.993} = \$1,127 \approx \$1,127 $$
Therefore, the equivalent annual cost of the electric drills is about $1,127.