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The initial cost of a machine is $750,000. This machine costs $12,000 a year to operate...

The initial cost of a machine is $750,000. This machine costs $12,000 a year to operate and has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10%?
options: -$301,586
-$313,586
-$259,947
-$326,947
-$285,942

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Answer #1

Annuity factor = [1 - 1 / (1 + r)^n] / r

Annuity factor = [1 - 1 / (1 + 0.1)^3] / 0.1

Annuity factor = [1 - 0.751315] / 0.1

Annuity factor = 2.486852

Equivalent annuity cost = (Initial investment / annuity factor) + maintenance cost

Equivalent annuity cost = (750,000 / 2.486852) + 12,000

Equivalent annuity cost = 313,586

Since these are outflows, it will have a negative sign

Equivalent annuity cost = -$313,586

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