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13 July, 01:43

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?

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  1. 13 July, 01:48
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    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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