You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $5

Question

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $59,500, has a 5-year life, and has an annual OCF (after tax) of –$10,500 per year. The Keebler CookieMunster costs $92,500, has a 7-year life, and has an annual OCF (after tax) of –$8,500 per year.

If your discount rate is 13 percent, what is each machine’s EAC? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $59,500, has a 5-year life, and has an annual OCF (after tax) of –$10,500 per year. The Keebler CookieMunster costs $92,500, has a 7-year life, and has an annual OCF (after tax) of –$8,500 per year.

Explanation / Answer

So, as we can see, the annualized cost is less in Option 1, So, The Pillsbury 707 should be selected.

The Pillsbury 707 Calculations Years 0 1 2 3 4 5 A Initial Cost -59500 -10500 -10500 -10500 -10500 -10500 B PV factoor @13% 1.0000 0.8850 0.7831 0.6931 0.6133 0.5428 C = A x B Present Value -59500 -9292.04 -8223.04 -7277.03 -6439.85 -5698.98 D = Sum C Net Present Value -96430.9 E = Sum B 1 to 5 Sum of PV 3.5172 F = D / E Annualized Cost -27416.7

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