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Hello Sir John Moffat, I need your help on this question:
A company operates a machine which has the following costs and resale values over its four-year life.
Purchase cost: $25,000
Year 1 Year 2 Year 3 Year 4
$ $ $ $
Running costs (cash expense) 7,500 11,000 12,500 15,000
Resale value (end of year) 15,000 10,000 7,500 2,500
The organisation’s cost of capital is 10%.
16. What is the equivalent annual cost if replacement yearly?
A $(50,003)
B $(20,003)
C $(18,183)
D $(5,736)You must have an answer in the same book in which you found the question, and you should use this forum to ask about whatever it is in the answer you are not clear about.
For a machine replaced after one year, the cash flows are:
0 cost (25,000)
1 running cost (7,500)
1 scrap 15,000The present value at 10% = (18,183)
For the EAC divide by the 1 year annuity factor: 18,183 / 0.909 = 20,003
I do suggest that you watch my free lectures on this, whee I explain and work through an example. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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