Evaluate equivalent annual cost, Financial Accounting

Assignment Help:

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)


Related Discussions:- Evaluate equivalent annual cost

Future rates of return, Assume your grandparents have just given you $20,00...

Assume your grandparents have just given you $20,000 on the condition that you invest the money in the stock market. As you contemplate making your investment choices, what account

Determine the cost of equity, Lockheed Martin's management wishes to fi...

Lockheed Martin's management wishes to find out whether they have excess debt capacity. Its current market value of equity is $40 b and its book value of debt is $

How do you react to the investment banker?, You are the CFO of Diversi?ed I...

You are the CFO of Diversi?ed Industries. Diversi?ed has suffered through 4 or 5 tough years. This has deteriorated its ? financial condition to the point that Diversi?ed is in dan

Impairment of Long-lived assets, How to calculate fair value of long-lived ...

How to calculate fair value of long-lived asset when the information about fair value is not available?

Which is not necessary in order for corporation to pay cash, Q. Which one o...

Q. Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash b. Approval of stockholders c. Declaration of dividends by the bo

Conversion into a company-partnership, CONVERSION INTO A COMPANY The part...

CONVERSION INTO A COMPANY The partners may convert their business and trade in form of a company. This may be due to some of the advantages a company has over a partnership. E.g.

Deferred tax-income tax-financial statement, Deferred tax A company may e...

Deferred tax A company may enter into transactions in the current financial period that may result in the firm either paying or saving some tax in the future. The tax that may be

Normal values of accounting ratios, Comparison with Sector Averages Any...

Comparison with Sector Averages Any conclusion relating to the signs of overtrading needs to be put in the context of the normal values of accounting ratios indicated by the se

Prepare a statement of cash flows, The comparative balance sheet of Portabl...

The comparative balance sheet of Portable Luggage Company at December 31, 2008 and 2007, is as follows An examination of the income statement and the accounting records revealed th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd