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Hi all
I know I probably been thick but I am just looking in the BPP Practice and Revision Kit at Mock Exam 2 Question 1 (a) and I understand all the workings but I don’t understand where the equivalent annual cost is coming from at the bottom of each working??! Figures (6751) every year. (6111) every two years and (6208) every three years – if someone could help I’d really appreciate it. Thank youEquivalent annual cost = Present Value (of first machine)/Annuity Factor (of replacement period)
Exactly
Equivalent Annual Cost (EAC) = NPV / Annuity factorAssume the question says the asset is going to last 4 years. Applying the above formulate.
1. Calculate NPV using all assets related cash flows.
2. Take NPV calculated in step 1 and divide by Annuity factor (Y1 – Y4)
(Assuming that you have an NPV of $200,000 and a D.F @ 12%)EAC = 200,000/3.037
3.037 is from your annuity table @12% for year 4Good Luck 🙂
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