Ask Question
8 April, 10:48

Consider a palletizer at a bottling plant that has a fi rst cost of $150,000, operating and maintenance costs of $17,500 per year, and an estimated net salvage value of $25,000 at the end of 30 years. Assume an interest rate of 8 percent. What is the annual equivalent cost of the investment if the planning horizon is 30 years?

+3
Answers (1)
  1. 8 April, 12:04
    0
    Annual equivalent cost of the investment = $30,603.43 per annum

    Explanation:

    Equivalent Annual cost is the Present Value of the total cost over the investment period divided by the appropriate annuity factor.

    Step 1

    PV of cash flows

    PV of first cost = 150,000

    PV of annual maintenance cost of $17,500

    = 17,500 * (1 - (1+0.08) ^ (-30)) / 0.08

    = 197,011.21

    PV of salvage value

    $25,000 * (1+0.08) ^ (-30)

    = 2,484.43

    PV of net total cost

    = 197,011.21 + 150,000 - 2,484.43

    = 344,526.78

    Step 2

    Determine the annuity factor for 30 years at 8%

    (1 - (1+0.08) ^ (-30)) / 0.08

    =11.2577

    Step 3

    Equivalent annual cost

    = 344,526.78 / 11.2577

    =$30,603.43

    Annual equivalent cost of the investment = $30,603.43 per annum
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Consider a palletizer at a bottling plant that has a fi rst cost of $150,000, operating and maintenance costs of $17,500 per year, and an ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers