Question

"A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,657.00 to install, $5,196.00 to operate per year for 7 years at which time it will be sold for $6,821.00. The second, RayCool 8, costs $41,605.00 to install, $2,132.00 to operate per year for 5 years at which time it will be sold for $8,996.00. The firm’s cost of capital is 6.53%. What is the equivalent annual cost of the RayCool8?"

2 decimal places please.

Answer 1

Solution :

The the equivalent annual cost of the RayCool8 is = - $ 10,572.64

The the equivalent annual cost of AC360 is = - $ 9,261.96

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.

21.11.2019 - Microsoft Excel PAGE LAYOUT FORMULAS DATA REVIEW VIEW HOME A B INSERT C (2) Statement showing calculation of Equivalent Annual cost of RayCool 8 SI.No. Year Particulars Amount of Cash Flow PV Factor @ 6.53 % Discounted Cash flows (3) = (1) * (2) 1 Cash Outflow Year 1 - Annual Operating cost $ -2,132.00 0.9387 $ -2,001.31 2 Cash Outflow Year 2- Annual Operating cost $ -2,132.00 0.8812$ -1,878.64 3 Cash Outflow Year 3 - Annual Operating cost $ -2,132.00 0.8271 $ -1,763.48 4 Cash Outflow Year 4 - Annual Operating cost $ -2,132.00 0.7764 $ -1,655.39 5 Cash Outflow Year 5 - Annual Operating cost $ -2,132.00 0.7289 $ -1,553.92 6 Cash Inflow Year 5 - Salvage value 8,996.00 0.7289 $ 6,556.77 Total of discounted cash outflows = SUM(G32:637) -2,295.97 Initial Investment 1.0000 $ -41,605.00 Net Total cash Outflows = (7) + (8) -43,900.97 PVIFA at 6.53 % for 5 years 4.1523 EAC = (9)/(10) = Total of cash outflows / PVIFA at 6.53 % for 5 years -10,572.64 6600 VW

21.11.2019 - Microsoft Excel JESSE FILE HOME INSERT А в с PAGE LAYOUT FORMULAS DATA REVIEW VIEW Statement showing calculation of Equivalent Annual Cost of AC360 Sl.No. Year Particulars Amount of Cash Flow PV Factor @ 6.53 % Discounted Cash flows |(2) (3) = (1) * (2) 1 Cash Outflow Year 1 - Annual Operating cost $ -5,196.00 0.9387 $ -4,877.50 2 Cash Outflow Year 2 - Annual Operating cost $ -5,196.00 0.8812 $ -4,578.52 3 Cash Outflow Year 3 - Annual Operating cost $ -5,196.00 0.8271 $ -4,297.87 4 Cash Outflow Year 4 - Annual Operating Cost -5,196.00 0.7764 $ -4,034.42 5 Cash Outflow Year 5 - Annual Operating Cost $ -5,196.00 0.7289 $ -3,787.12 6 Cash Outflow Year 6 - Annual Operating cost $ -5,196.00 0.6842 $ -3,554.98 7 Cash Outflow Year 7 - Annual Operating cost $ -5,196.00 0.6422 $ -3,337.07 7 Cash Inflow Year 7- Salvage value 6,821.00 0.6422 $ 4,380.71 Total of discounted cash flows = SUM(G4:611) -24,086.78 Initial Investment 1.0000 -26,657.00 Net Total cash Outflows = (9) + (10) -50,743.78 PVIFA at 6.53 % for 7 years 5.4787 131 EAC = (11)/(12) = Total of cash outflows / PVIFA at 6.53 % for 7 years | -9,261.96 auw 1800