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Assume the initial cost of a machine is $923,800 and it costs $67,300 a year to...

  1. Assume the initial cost of a machine is $923,800 and it costs $67,300 a year to operate. The machine has a life of four years before it is replaced. Ignore taxes. What is the equivalent annual cost of this machine if the required return is 14 percent?

    A.

    $384,353
    B.

    $297,152
    C.

    $410,642
    D.

    $177,496
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Answer #1
Machine
Discount rate 0.14
Year 0 1 2 3 4
Cash flow stream 923800 67300 67300 67300 67300
Discounting factor 1 1.14 1.2996 1.481544 1.6889602
Discounted cash flows project 923800 59035.09 51785.16 45425.58 39847.003
NPV = Sum of discounted cash flows
NPV Machine = 1119892.84
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Equvalent annuity(EAA)= 384353
Required rate =   0.14
Year 0 1 2 3 4
Cash flow stream 0 384352.6 384352.6 384352.6 384352.58
Discounting factor 1 1.14 1.2996 1.481544 1.6889602
Discounted cash flows project 0 337151.4 295746.8 259427 227567.58
Sum of discounted future cashflows = 1119892.84
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
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