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
In May of 2010, a business placed in service $35,000 of property eligible for limited expensing under §179. Line 13 of Form 4562 for 2009 was $15,000. Net income before cost recove


The costs that follow were extracted from the accounting records of various different manufacturers: 1.    Weekly wages of an equipment maintenance worker 2.    Marketing costs

Q. Illustrate Management of commercial and political risk? Commercial risk comprises both the physical risk that goods in transit may be lost stolen or destroyed as well as the

1. To qualify as official development assistance (ODA), development loans must have a grant element of at least 25 percent, calculated using a stated annual interest rate of 10 per

cheque issued and presented for payment 400 in cash book debit balance

The management of Gimenez Corporation is investigating an investment in equipment that would have a useful life of 7 years. The company uses a discount rate of 17% in its capital b

Perform a business size-up of Sugar and Spice Bakery. 2. Qualitatively analyze the opportunity of closing the storefront to cater events.


Assume that we are in December 2009 and try to make forecasts of the five year interest rate at the end of January 2010. For this question , you just need to fill out the blank s