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you are operating an old machine that is expected to produce a cash inflow of $5100...

you are operating an old machine that is expected to produce a cash inflow of $5100 in each of the next 3 years before it fails. You can replace it now with a new machine that costs $20,100 but is more efficient and will provide a cash flow of $10,150 a year for 4 years. Calculate the equivilant annual cost of the new machine if the discount rate is 14%.

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Answer #1
Discount rate 14.0000%
Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow
           (20,100.000) 0                           (20,100.00)                       (20,100.00)
               5,050.000 1                               4,429.82                       (15,670.18)
               5,050.000 2                               3,885.81                     (11,784.364)
               5,050.000 3                               3,408.61                          (8,375.76)
             10,150.000 4                               6,009.61                          (2,366.14)

PV = -2366.14, FV = 0, N = 4, rate = 14%

use PMT function in Excel

equivalent annual cost = 812.07

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