A piece of medical equipment costs $350,000, has a useful life of 10 years and a salvage value of 10 percent of the original purchase price. Investments with similar risk earn a 12 percent rate of return. Calculate the average opportunity cost per year.

The answer is $59,948.7

Explanation:

Solution

Given that:

The Cost of medical equipment = $350,000

The Salvage value = 10% of cost of medical equipment = 0.10 * $350,000 = $35,000

Now,

The Useful life = 10 years

Thus,

It has been stated that investment with risk similar earn is a 12% rate of return.

Hence, the average opportunity cost per year is equal to the equal cost annual of this medical equipment.

So

We Calculate the equivalent annual cost -

Which is

EAC = Cost of medical equipment (A/P, i, n) - salvage value (A/F, i, n)

EAC = 350,000 (A/P, 12%, 10) - [35,000 (A/F, 12%, 10) ]

EAC = [350,000 * 0.17698] - [35,000 * 0.05698]

EAC = 61,943 - 1994.3

EAC = 59,948.7

Therefore, the opportunity cost average per year is $59,948.7