Bottoms Up Diaper Service is considering the purchase of a new industrial washer

Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $10,000 and sell its old washer for $6,000. The new washer will last for 5 years and save $2,500 a year in expenses. The opportunity cost of capital is 14%, and the firm’s tax rate is 35%. What is the equivalent annual cost of the washer, if the firm uses straight-line depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $10,000 and sell its old washer for $6,000. The new washer will last for 5 years and save $2,500 a year in expenses. The opportunity cost of capital is 14%, and the firm’s tax rate is 35%. What is the equivalent annual cost of the washer, if the firm uses straight-line depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Initial investment = 10,000 -6,000 = $ 4,000

Present value of net benefit = PVAF@14%,5years *net benefit

                                        = 3.43308 *2325

                                        = $ 7981.91

**net benefit = benefit (1-tax) + depreciation *tax

                 = 2500 (1-.35) + 2000*.35

                =1625+700

                 = 2325

NPV =Present value - iNitial investment

        = 7981.91 - 4000

       = $ 3981.91

Equivalent annual cost =NPV /PVAF

                                  = 3981.91 / 3.43308

                                  = $1159.87 per year

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