Question

You are starting a family pizza parlor and need to buy a motorcycle for delivery orders. You have two models in mind. Model A costs $9,600 and is expected to run for 6 years; Model B is more expensive, with a price of $13,800, and has an expected life of 9 years. The annual maintenance costs are $790 for Model A and $630 for Model B. Assume that the opportunity cost of capital is 10 percent.

EAC of Model A is		$
EAC of Model B is		$

Answer 1

Solution :

EAC of Model A is = - $ 2,994.23

EAC of Model B is = - $ 3,026.24

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

15.03.2020 - Microsoft Excel ES HOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW (2) Statement showing calculation of EAC of Model A SI.No. Year Particulars Amount of Cash Flow |PV Factor @ 10% Discounted Cash flows (3) = (1) * (2) 1 Cash Outflow Year 1- Annual Maintenance Cost $ -790.00 0.9091 $ -718.1818 2 Cash Outflow Year 2- Annual Maintenance Cost $ -790.00 0.8264 $ -652.8926 3 Cash Outflow Year 3 - Annual Maintenance Cost $ -790.00 0.7513 $ -593.5387 4 Cash Outflow Year 4 - Annual Maintenance Cost $ -790.00 0.6830 $ -539.5806 5 Cash Outflow Year 5 - Annual Maintenance Cost $ -790.00 0.6209 $ -490.5278 6 Cash Outflow Year 6 - Annual Maintenance Cost $ -790.00 0.5645 $ -445.9344 Total of discounted cash flows = SUM(G4:59) -3,440.6560 Initial Investment $ -9,600.0000 1.0000 $ -9,600.0000 Net Total cash Outflows = (7) + (8) -13,040.6560 PVIFA at 10 % for 6 years 4.3553 | EAC = (9)/(10) = Net Total of cash outflows / PVIFA at 10 % for 6 years -2,994.2309 Equivalent Annual Cost ( when rounded off to two decimal places) -2,994.23 BBBauw

15.03.2020 - Microsoft Excel PAGE LAYOUT FORMULAS DATA REVIEW VIEW FILE HOME INSERT I ABC Sl.No. Year Particulars Statement showing calculation of EAC of Model B Amount of Cash Flow |PV Factor @ 10% Discounted Cash flows (3) = (1) * (2) (1) (2) 1 Cash Outflow Year 1 - Annual Maintenance Cost $ -630.00 2 Cash Outflow Year 2- Annual Maintenance Cost $ -630.00 3 Cash Outflow Year 3 - Annual Maintenance Cost $ -630.00 4 Cash Outflow Year 4 - Annual Maintenance Cost | $ -630.00 5 Cash Outflow Year 5 - Annual Maintenance Cost | $ -630.00 6 Cash Outflow Year 6 - Annual Maintenance Cost $ -630.00 7 Cash Outflow Year 7 - Annual Maintenance Cost $ -630.00 8|Cash Outflow Year 8 - Annual Maintenance Cost | $ -630.00 9 Cash Outflow Year 9 - Annual Maintenance Cost $ -630.00 Total of discounted cash flows = SUM(G32:40) O Initial Investment $ 13,800.0000 Net Total cash Outflows = (10) + (11) PVIFA at 10 % for 9 years EAC = (12) / (13) = Net Total of cash outflows / PVIFA at 10% for 9 years Equivalent Annual Cost (when rounded off to two decimal places) 0.9091 $ 0.8264 $ 0.7513 $ 0.6830 $ 0.6209 $ 0.5645 $ 0.5132 $ 0.4665 $ 0.4241 $ -572.7273 -520.6612 -473.3283 -430.2985 -391.1804 -355.6186 -323.2896 -293.8996 -267.1815 -3,628.1850 -13,800.0000 -17,428.1850 5.7590 -3,026.2394 -3,026.24 의프 1.0000 $