Consider a palletizer at a bottling plant that has a fi rst cost of $150,000, operating and maintenance costs of $17,500 per year, and an estimated net salvage value of $25,000 at the end of 30 years. Assume an interest rate of 8 percent. What is the annual equivalent cost of the investment if the planning horizon is 30 years?

Annual equivalent cost of the investment = $30,603.43 per annum

Explanation:

Equivalent Annual cost is the Present Value of the total cost over the investment period divided by the appropriate annuity factor.

Step 1

PV of cash flows

PV of first cost =  150,000

PV of annual maintenance cost of $17,500

= 17,500× (1-(1+0.08)^(-30))/0.08

= 197,011.21

PV of salvage value

$25,000 × (1+0.08)^(-30)

= 2,484.43

PV of net total cost

= 197,011.21  +150,000 - 2,484.43

=  344,526.78

Step 2

Determine the annuity factor for 30 years at 8%

(1-(1+0.08)^(-30))/0.08

=11.2577

Step 3

Equivalent annual cost

= 344,526.78 / 11.2577

=$30,603.43

Annual equivalent cost of the investment = $30,603.43 per annum

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