1.5. Calculating Equivalent Annual Cost for Year 1

Try these first

1. 1.

   What is the formula to calculate Equivalent Annual Cost?

   Hint

   Recall the terms used in the capital recovery calculation.

2. 2.

   What is the purpose of calculating the present worth?

   Hint

   Think about how time affects the value of money.

3. 3.

   What does EAC stand for?

   • Estimated Average Cost
   • Equivalent Annual Cost
   • Effective Annual Cost

   Hint

   Remember the terminology related to annualizing costs.

4. 4.

   Is a lower EAC always better? True or False.

   • True
   • False

   Hint

   Think about the implications of cost reduction.

5. 5.

   A machine costs ₹5,000,000 with a resale value of ₹1,000,000 after 10 years. If the maintenance costs are ₹500,000 annually, calculate the EAC for year 1.

   Hint

   Break down the costs into present worth and annual recovery.

6. 6.

   Discuss how the change from 10% to 15% interest will influence EAC decisions over a 5-year period, using examples.

   Hint

   Consider the financial impact of the increased rates on annual costs.