1.2. Finding the Equivalent Annual Cost of Operating and Maintenance Cost

Try these first

1. 1.

   Define Equivalent Annual Cost (EAC).

   Hint

   Think about how costs can accumulate.

2. 2.

   What does Present Worth represent?

   Hint

   It's all about today versus tomorrow.

3. 3.

   What is Equivalent Annual Cost?

   • A single lump sum cost
   • An annualized cost from total expenses
   • A cash inflow from sales

   Hint

   Focus on the word 'annual'.

4. 4.

   Is Present Worth the same as future value?

   • True
   • False

   Hint

   Remember, one is today’s value, the other is future value.

5. 5.

   A company has annual costs for maintenance as follows: Year 1: 50,000, Year 2: 70,000, and Year 3: 90,000. Using the respective USCRFs of 1.05, and 0.95, calculate the EAC over three years.

   Hint

   Each year's costs must be discounted based on its timing.

6. 6.

   Discuss how the potential future increase in interest rates may affect decisions on retaining or replacing machinery based on EAC.

   Hint

   Think about the direct impact on borrowing or investment worth.