White Oaks Properties builds strip shopping centers and small malls. The company

Question

White Oaks Properties builds strip shopping centers and small malls. The company plans to replace its refrigeration, cooking, and HVAC equipment with newer models in one entire center built 9 years ago. 9 years ago, the original purchase price of the equipment was $625,000 and the operating cost has averaged $245,000 per year. Determine the equivalent annual cost of the equipment if the company can now sell it for $184,000. The company’s MARR is 21% per year.

The equivalent annual cost of the equipment is determined to be $  .

Explanation / Answer

The formula of EAC = NPV/A,t,r

NPV = cash flows*no. of time period - Intial investment / interest rate

NPV = 2205000 * 9 years - 625000 / 21% = 331800/-

Now we will calculate EAC (equivalent annual cost) :-

Its formula is : NPV/present annuity value

Present annuity value = P ( 1- (1+r) * t / r = 184000 (1 - (1 + 5%) * 9 / 5%

= 310960/-

Now EAC = NPV / PAV = 331800 / 310960 = $ 1. 067

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