You are planning to buy snow removal equipment - (a sure way to make money in NY
ID: 2758700 • Letter: Y
Question
You are planning to buy snow removal equipment - (a sure way to make money in NY in April!). The machine you need costs $55,000 and has operating and maintenance costs that start at $15,000 the first year and increase by $2,000 per year each year thereafter. Assume that the salvage value at the end of 5 years is $2,000 and interest rate is 12%. What is the equivalent annual cost (i.e. annual worth) of owning and operating the machine?
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Explanation / Answer
F
G
H
I
J
K
L
4
Years
Cost
Operating and maintanance
Salavage value
Net cost
Dis factor @12%
Discounted cashflow
5
0
-55000
SUM(G5:I5)
1.000
J5*K5
6
1
-15000
SUM(G6:I6)
K5/1.12
J6*K6
7
2
H6-2000
SUM(G7:I7)
K6/1.12
J7*K7
8
3
H7-2000
SUM(G8:I8)
K7/1.12
J8*K8
9
4
H8-2000
SUM(G9:I9)
K8/1.12
J9*K9
10
5
H9-2000
2000
SUM(G10:I10)
K9/1.12
J10*K10
11
NPV
SUM(L5:L10)
12
Discount factor
SUM(K6:K10)
13
Equivalent annual cost
L11/L12
F G H I J K L 4 Years Cost Operating and maintanance Salavage value Net cost Dis factor @12% Discounted cashflow 5 0 -55000 -55000 1.000 -55,000 6 1 -15000 -15000 0.893 -13,393 7 2 -17000 -17000 0.797 -13,552 8 3 -19000 -19000 0.712 -13,524 9 4 -21000 -21000 0.636 -13,346 10 5 -23000 2000 -21000 0.567 -11,916 11 NPV -1,20,731 12 Discount factor 3.605 13 Equivalent annual cost -33491.9048Related Questions
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