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a company buys a machine for $10000 and sells it for $2000 at time 3.Running cost of the machine are;time 1=$3000;tiime 2=$5000;time 3=$7000.
if a series of machine are bought,run and sold on an infinite cycle of replacement ,what is the equivalent annual cost of machine if the discount rate is 10%.
please answer and explain pleaseHave you watched the lecture on replacement?
You calculate the PV of one machine.
For the equivalent annual cost, you divide the PV by the annuity discount factor for 3 years at 10%.
For more explanation you are going to have to watch the lecture – I cannot type it out here!!
You found this question in the Kaplan Exam Kit. It is one of several mistakes that there are in their exam kit, and the correct answer is $8750 p.a.. (You should find a correction sheet if you go to their website using the code in the Exam Kit).
(The answer in the book is completely wrong.)
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