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A question asks to find EAC :- (Kaplan-Chapter -5-TYU-3)
Cost of Machine – $20000 (will be incurred now)
Operating costs $ 5000 (Will be paid at the end of the year)Calculating PV of the above figures, what I understood was to discount the cost of machinery which will be incurred now.
The PV of Operating costs which will be incurred only at the end of the year, I think can not be discounted for the present value, instead to be increased by the cost of capital as the present value of the money payable after one year would be higher than the amount decided to be paid today.
However the answer given in the text disocunted all the cash flows , I mean 20000 and 5000.
Can anybody throw some light to this as I am unable to figure out the underlying factor in doing so.
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