Question

Hi! I know the answers to my question--however, I need to know how to get to those results. Specifically how to find PVIFA and if you could give any hints as to how to do this on a financial calculator (I use BAII Plus Pro--But BAII Plus is fine--I think I can figure it out from there as long as you give step by step instructions--ie which buttons) that would be GREATLY appreciated.

The problem and answers are as follows:

Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $2,800 and will last for 6 years. The copier will require a real aftertax cost of $310 per year after all relevant expenses. The RH45 costs $3,300 and will last 8 years. The real aftertax cost for the RH45 will be $285 per year. All cash flows occur at the end of the year. The inflation rate is expected to be 6 percent per year, and the nominal discount rate is 10 percent. Calculate the EAC for each copier. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) XX40 RH45 EAC $ $ -840.20 -770.57 Which copier should the company choose? RH45 O XX40

Answer 1

As per Fisher's Equation,
(1+nominal rate)=(1+ real rate)x(1+inflation rate)
1.1=(1+real rate)(1.06)
1+real rate=1.1/1.06		1.03773585
Real Rate	3.77%
XX40
Cashflow	Years	Amount($)	PV Factor @3.77%	PV($)
Annual Cost	1-6	310	5.2816	1637.301
-Initial Cost				-2800
NPV				-1162.7
EAC (=NPV/PV Annuity Factor)				-220.141
RH45
Cashflow	Years	Amount($)	PV Factor @3.77%	PV($)
Annual Cost	1-8	285	6.7972	1937.188
-Initial Cost				-3300
NPV				-1362.81
EAC (=NPV/PV Annuity Factor)				-200.498
As, RH45 has lower Equivalent cost, the company should choose it.

Calculation of PV Factor
Year	PV Factor=1/(1.0377)^n
1	0.9637
2	0.9287
3	0.8949
4	0.8624
5	0.8311
6	0.8009	5.2816
7	0.7718
8	0.7437	6.7972