1.8. Calculating Equivalent Annual Cost of Resale Value

Try these first

1. 1.

   Define Equivalent Annual Cost (EAC).

   Hint

   Think about the overall costs incurred annually.

2. 2.

   What does the Present Worth Factor do?

   Hint

   Consider how future values are made relevant today.

3. 3.

   What does EAC stand for?

   • Enhanced Annual Cost
   • Equivalent Annual Cost
   • Estimated Annual Cost

   Hint

   Think about the cost of deploying financial resources in annual terms.

4. 4.

   True or False: The present worth factor discounts future cash flows to their value today.

   • True
   • False

   Hint

   Consider how you account for future gains in current spending.

5. 5.

   If a machine has an initial purchase price of 4,000,000, a salvage value of 600,000, and operating costs of 200,000 yearly, calculate the EAC over five years using a capital recovery factor of 0.2023.

   Hint

   Remember to factor in both the depreciation and annual operating costs.

6. 6.

   Evaluate how different salvage values (300,000 versus 600,000) could change the EAC calculation across five years. Assume the same operating costs and purchasing price.

   Hint

   Examine how salvage values affect overall cash flow calculations.