"A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,060.00 to install, $5,193.00 to operate per year for 7 years at which time it will be sold for $7,126.00. The second, RayCool 8, costs $41,530.00 to install, $2,020.00 to operate per year for 5 years at which time it will be sold for $8,934.00. The firm’s cost of capital is 5.45%. What is the equivalent annual cost of the AC360?"
2 decimal places please.
AC360 | ||||||||
Discount rate | 0.0545 | |||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Cash flow stream | -26060 | -5193 | -5193 | -5193 | -5193 | -5193 | -5193 | 1933 |
Discounting factor | 1 | 1.0545 | 1.11197 | 1.172573 | 1.2364778 | 1.303866 | 1.374927 | 1.44986 |
Discounted cash flows project | -26060 | -4924.61 | -4670.09 | -4428.72 | -4199.833 | -3982.77 | -3776.93 | 1333.232 |
NPV = Sum of discounted cash flows | ||||||||
NPV AC360 = | -50709.72 | |||||||
Where | ||||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||||
Equvalent annuity(EAA)= | -8907.10 | |||||||
Required rate = | 0.0545 | |||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Cash flow stream | 0 | -8907.1 | -8907.1 | -8907.1 | -8907.101 | -8907.1 | -8907.1 | -8907.1 |
Discounting factor | 1 | 1.0545 | 1.11197 | 1.172573 | 1.2364778 | 1.303866 | 1.374927 | 1.44986 |
Discounted cash flows project | 0 | -8446.75 | -8010.2 | -7596.2 | -7203.607 | -6831.3 | -6478.24 | -6143.42 |
Sum of discounted future cashflows = | -50709.72 | |||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||||
Discounted Cashflow= | Cash flow stream/discounting factor |
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