To calculate the equivalent annual cost (EAC) of the equipment that White Oaks Properties plans to replace in their shopping center, we need to consider the initial cost, operating costs, salvage value, and the company’s minimum attractive rate of return (MARR). The EAC is a useful financial metric that helps in evaluating the cost of owning and operating an asset over its useful life on an annual basis.
Now, let’s calculate the EAC step by step:
Step 1: Calculate the present worth of the salvage value. The salvage value is $184,000 to be received 10 years from now. To bring it to the present value, we use the formula for the present worth of a future sum:
Present Worth = Future Value / (1 + MARR)^n
where MARR is the minimum attractive rate of return, and n is the number of years. In this case, n is 10.
Present Worth of Salvage Value = $184,000 / (1 + 0.15)^10 Present Worth of Salvage Value ≈ $41,870.23
Step 2: Calculate the equivalent annual cost (EAC). EAC can be calculated using the following formula:
EAC = (Initial Cost – Present Worth of Salvage Value) / [(1 – (1 + MARR)^(-n)) / MARR]
EAC = ($750,000 – $41,870.23) / [(1 – (1 + 0.15)^(-10)) / 0.15] EAC ≈ ($708,129.77) / (7.0271) EAC ≈ $100,690.63 (rounded to the nearest cent)
Therefore, the equivalent annual cost (EAC) of replacing the equipment in the shopping center with newer models is approximately $100,690.63 per year. This represents the annual cost of owning and operating the equipment while considering the initial cost, operating costs, salvage value, and the company’s minimum attractive rate of return. It helps White Oaks Properties make informed financial decisions regarding this equipment replacement project.
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