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. Show the Basis of weightings? (i) Both costs of capital (Ke and Kd) as well as the WACC have been calculated using current   ex-dividend (ex-interest) market values rather t

Calculate the claim under insurance policy: 1) What do policy limits of 200/300/100 on an automobile insurance policy mean?Your automobile insurance policy contains policy lim

Prepare the journal entries required to record the following transactions of a nongovernment, not-for-profit organization.   1.  Unrestricted cash contributions received duri

Illustration of consolidated balance sheet H Ltd owned S Ltd since the date of incorporation of S Ltd. The balance sheets of the two  companies as at 31 December 20X2 is as fo

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price

ACCOUNTS UNDER TRUSTEE (a) Authorised investments The investments which trustees are permitted to hold may be specifically stated in the will or deed constituting the se

During the course you will be required to develop a Course Project having to do with writing notes for a fictitious annual report.

Fund accounting and preparation of financial statements) The scenario: At the start of the year beginning January 1, 2013, Coco City's General Fund had a cash balance of $40,000, v