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 $111,000, has a 4 year life, and costs $10,300 per year to operate. The relevant discount rate is 15 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 $26,500 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.)

  EAC $

Explanation / Answer

Depreciation = 111000 /4 = 27750

Tax savings on depreciation = 27750 * .35 = 9712.5

After tax cost = 10300 (1-.35) =6695

Net cash flow annually = 9712.5 - 6695   = 3017.5

After tax salvage at year 4 = 26500(1-.35) = 17225

Present of cash flow = (PVAF@15%,4*Annual CF)+(PVF@15%,4* Salvage)

              =(2.85498 * 3017.5) + (.57175 * 17225)

              = 8614.90+ 9848.39

             = 18463.29

Net cost = 111000 - 18463.29 = 92536.70

EAC = Net cost /PVAF@15%,4

        = 92536.7 / 2.85498

       = 32412.38

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