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 This topic has 3 replies, 3 voices, and was last updated 2 years ago by Cath.

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January 14, 2017 at 2:50 pm #366488abz12
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Hi Cath.
I hope you are well. I have been busy studying this past week and looking to sit my exam w/c 22nd.. or a little later if I am not ready. I am just going to focus on questions for the next 2 weeks or so…
Just a question from the BPP questions bank on Equivalent annual costs Chapter on further aspects of decision making.
An investor is indifferent between replacing a machine every 2 years and replacing it every 4 years.
The present value of the first 2 years replacement cycle is 17,360 and the PV of the first 4 years replacement cycle is 31,700. What discount rate is the investor using?
A) 5%
B)10%
C)15%
D)20%Answer: The solution says with such a question is is trail and error and we should us the different multiple choice questions as a basis.
It then goes on to say that for an investor to be indifferent the annual equivalent cost must be the same. This is the point I do not get.
… the answer then goes on to calculate the annual equivalent cost
y2= 17,360/1.736 ( using 10% discount rate) 10,000
y4= 31,700/3.170= 10,000 (again using the same discount rate)I am trying to take a step back and ensure I understand the theory.. so an equivalent annual cost is a method used to calculate an optimal replacement cycle. It helps us with asset replacement decisions. If an investor is indifferent..so he does not care.. then the annual equivalent rate.. should be the same..I think I may have answered my own question but please Cath can you check my logic.. thought process?
January 22, 2017 at 12:50 pm #368868CathModerator Topics: 0
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Sorry I missed this one Abz…
You have a good understanding of this one – and your logic is right…. except Ive made one tiny change to your answer:
“If an investor is indifferent..so he does not care.. then the annual equivalent COST .. should be the same at the given rate.”
I think you probably meant that anyway 🙂
Kind Regards
CathAugust 31, 2020 at 12:44 am #582798fredymaila Topics: 48
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Hello Cath, I really know a way to find the solution directly without Trial and Error.
Can you please contact me via WhatsApp on +255718326837 as I have something to talk to you privately?
Please please as I have been following Opentuition for so many years.
Thanks Cath.
September 10, 2020 at 7:45 pm #584882CathModerator Topics: 0
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Hi Fredymalia – please share your thoughts on here – I cant give you my mobile number – sorry!

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