a standby generator was purchased 6 years ago for $4200 similar equipment has sh

Question

a standby generator was purchased 6 years ago for $4200 similar equipment has shown an economic life of 15 years with salvage of 15% of the first cost , the generator is no longer needed and is to be sold for $1800, the interest rate is 8% , what is the difference between the actual and anticipated equivalent annual capital recovery cost ?

Explanation / Answer

Rate of return r 8.00% Formula Case -> Anticipated Actual Cash flow PV of Cash flow Year Cash flow PV of cash flow Cash flow PV of cash flow A A/(1+r)^0 0 -4,200 $      (4,200.00) -4,200 $    (4,200.00) B B/(1+r)^1 1 0 $                 -   0 $              -   C C/(1+r)^2 2 0 $                 -   0 $              -   D D/(1+r)^3 3 0 $                 -   0 $              -   E E/(1+r)^4 4 0 $                 -   0 $              -   F F/(1+r)^5 5 0 $                 -   0 $              -   G G/(1+r)^6 6 0 $                 -   1,800 $     1,134.31 H H/(1+r)^7 7 0 $                 -   0 $              -   I I/(1+r)^8 8 0 $                 -   0 $              -   J J/(1+r)^9 9 0 $                 -   0 $              -   K K/(1+r)^9 10 0 $                 -   0 $              -   11 0 $                 -   0 $              -   12 0 $                 -   0 $              -   13 0 $                 -   0 $              -   14 0 $                 -   0 $              -   15 -630 $         (198.60) 0 $              -   NPV (needs to be >=0 to be feasible Sum of above PVs of cash flow NPV(A) $   (4,398.6023) NPV(A) $(3,065.6947) Eq annual cost recovery Eq annual cost recovery ($513.89) Eq annual cost recovery ($663.16) Hence Difference = $ 663.16-$513.89 = $ 149.27 = Answer

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