Automated Manufacturers uses high-tech equipment to produce specialized aluminum

Question

Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,480,000 to purchase plus an additional $49,000 a year to operate. The machines have a 6-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 16 percent? Use depreciation using straight line to zero. Assume tax rate of 40%

Please leave a full explanation along with the answer. Thanks

Explanation / Answer

Present Value of total cost =1,480,000 + (49000- 295,666.67*0.40)PVIFA(16%,6)

=1,480,000-69,266.67*3.6847

=1,224,770.61

Equivalent Annual Cost=1,224,770.61/ PVIFA(16%,6) =$332,393.58

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