Bridgton Golf Academy is evaluating new golf practice equipment. The \"Dimple-Ma

Question

Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $105,000, has a 5 year life, and costs $9,700 per year to operate. The relevant discount rate is 11 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $23,500 at the end of the project’s life. The relevant tax rate is 35 percent. All cash flows occur at the end of the year. What is the equivalent annual cost (EAC) of this equipment? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $105,000, has a 5 year life, and costs $9,700 per year to operate. The relevant discount rate is 11 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $23,500 at the end of the project’s life. The relevant tax rate is 35 percent. All cash flows occur at the end of the year. What is the equivalent annual cost (EAC) of this equipment? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Details Amount DF Discounted Cash flow Initial Cost of equipment -1,05,000.00           1.00 -1,05,000.00 Annual Operating Cost          9,700.00 Operating cash flow for 5 Years Net of Tax (9700*1-.35)          6,305.00           3.70      -23,302.63 Less annual Depreciation Tax Savings (-105000/5*0.35)        -7,350.00           3.70        27,164.84 Less Salvage Value Net of Tax (23500-0)*.65        15,275.00           0.59          9,064.97 Present Value of total Cash flow      -92,072.82 Equivalent Annual Cost =Discounted Cash outflow/PVANF      -24,912.17

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