Evaluate equivalent annual cost, Financial Accounting

Q. Evaluate Equivalent annual cost?

There are a number of techniques to answering this question and two are presented. The first difficulty is in deciding which broad approach to use. The broad approach which appears best is to inflate the cash flows at their different inflation rates and to discount at the money discount rate. Using this wider approach the lowest common multiple method would look like

The lowest common multiple is 2 × 3 = 6 years therefore the cash flows for each of the alternatives will be presented in these terms.

2 year cycle: (cash flows are overstated according to their individual inflation rates)

2316_Evaluate Equivalent annual cost.png

3 year cycle: (cash flows are overstated according to their individual inflation rates)

552_Evaluate Equivalent annual cost2.png

Therefore a two year replacement cycle is preferable since it represents the lowest cost.

On the other hand an equivalent annual cost approach could be used

2 year cycle: (cash flows are overstated according to their individual inflation rates)

280_Evaluate Equivalent annual cost3.png

Equivalent annual cost = 12705/ (annuity factor at 15% for two years) = 12705/1·626 = 7813

3 year cycle (cash flows are inflated according to their individual inflation rates)

Posted Date: 7/11/2013 6:45:27 AM | Location : United States







Related Discussions:- Evaluate equivalent annual cost, Assignment Help, Ask Question on Evaluate equivalent annual cost, Get Answer, Expert's Help, Evaluate equivalent annual cost Discussions

Write discussion on Evaluate equivalent annual cost
Your posts are moderated
Related Questions
Q. Probability of Success in Application for Debt Finance? I have to advise you that there are signs of overtrading in our recent financial statements and our company is approa

GOLD MOUNTAIN SKI RESORT CASE You work for a venture firm and have been asked to analyze a proposal from a group of investors interested in building a new ski area in Colorado. The

1. Consider the following balance sheet: Best Care HMO                  Balance Sheet               June 30, 2007 Assets  / Current Assets*

Q. Explain the Negative Assurance? Negative Assurance - Report issued by an ACCOUNTANT based on limited procedures which states that nothing has come to accountant's attention

Calculation of Leverage ratios  -                     2008 2009 2010 U EBIT or Oper


CHARACTERISTICS OF PARTNERSHIP

Effect of Winding-up Order The consequences of a winding-up order are: 1) Any disposition of the company's property and any transfer of shares is void, unless the court otherwis

A lawn care company started business on January 1, 2012. The company billed clients $105,000 for lawn care services completed in 2012. By December 31, the company had received $84,

#define stock exchange? mention the SEBI guideline pertaining to the functioning of stock exchange? question..