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A equipment costing $120,000 has a useful life of six years after which its estimated value will be $25000 .Annual running cost be $4,000 for first two years and $6,000 for each of next four years .All running cost are payable on last day of year to which the relate.
Using discount rate of 15% per annum what is equivalent annual cost of using equipment if it were bought and replaced every six years is perpetuity?
I calculated this as:
Multiplied by AF & DF as needed.
0-Initial-(120,000)*1
1-2, Cost-(4000)*1.626
3-6, Cost- (6000)*3.784-0.870
6, Scrap- 25000*.432
After I calculated PV and then EAC. Is this correct way? My answer is wrong.In future, if you want for me to help then you should ask in the Ask the Tutor Forum – this forum is for students to help each other.
The answer as you have typed it is fine, except for the flow of 6,000 from time 3 to time 6.
The discount factor to use is the 6 year annuity (3.784) minus the 2 year annuity factor (1.626).
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