Equivalent annual cost calculation: Barry Boswell is a financial analyist for Do

Question

Equivalent annual cost calculation: Barry Boswell is a financial analyist for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firms new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they each cost to purchase and install they offer very different cash flows. Alternative A has a usefull life of 7 years wheras alternative B will only last for 3 years. The after-tax cash flows from the two projects are as follows:
Year 0 Alternative A: (75,000), Alternative B: (75,000)
Year 1 Alternative A: (19,000), Alternative B: (5,000)
Year 2 Alternative A: (19,000), Alnterative B: (5,000)
Year 3 Alternative A: (19,000), Alternative B: (5,000)
Year 4 Alternative A: (19,000)
Year 5 Alternative A: (19,000)
Year 6 Alternative A: (19,000)
Year 7 Alternative A: (19,000)

a) Calculate each project's equivalent annual cost (EAC) given discount rate of 12 percent
b) Which of the alternatives do you think barry should select?

Explanation / Answer

a) EAC of Alternative A = 19000 + 75000*(12%*(1+12%)^7)/((1+12%)^7

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