Question

Precision Tool requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. A Machine it is using has an initial cost of $892,000, annual operating cash flow (OCF) of - $26,300, and a 4-year life. The machine will be replaced at the end of its useful life. What is the EAC of the machine? A- $338,737 B- $355,702 C- $376,907 D- $436,864

Answer 1

A -$338,737

Step-by-step explanation:

initial outlay = -$892,000

cash flows year 1 - 4 = -$26,300

first we must determine the present value of the machine and its associated cash flows

PV = -$892,000 - $26,300/1.15 - $26,300/1.15² - $26,300/1.15³ - $26,300/1.15⁴ = -$967,085.93

equivalent annual cost (EAC) = (NPV x i) / [1 - (1 + i)⁻ⁿ] = (-$967,085.93 x 15%) / [1 - (1 + 15%)⁻⁴] = -$338,736.69 ≈ -$338,737