PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 6, Problem 21PS
Summary Introduction
To determine: The equivalent annual cost.
Equivalent annual cost is the annual cost for owning, maintain, and operating an assert for its entire life. It can be used for making capital budgeting decision and it helps to compare the cost-effectiveness of various assets that have unequal lifespans.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
[College: Project Cost-Benefit Analysis Course, Economic Questions] - Can someone please explain the steps on how to complete these problems? Thank you in advance!
Find the equivalent cash cost today for a car purchased for $1000 down and $500 a month for 36 months, if money is worth 12% per year compounded monthly.
A person deposits $1100 at the end of the year for 20 years, and then withdraws an amount at the end of each year for the next 5 years. If money is worth 6% per year, and the same amount is withdrawn each year, what is the amount of each withdrawal?
A person invests $1000 per year in a fund, for 10 years, and then stops making payments. If money is worth 8% per year, what is the value in the fund at the end of 20 years?
Air conditioning for a college dormitory will cost $2.6 million to install and $145,000 per year to operate at current prices. The system
should last 14 years. The real cost of capital is 6%, and the college pays no taxes. What is the equivalent annual cost?
Note: Enter your answer in dollars not in millions and round your answer to 2 decimal places.
Equivalent annual cost
A neighborhood shopping center is expected to generate after-tax cash flow of $750,000 per year (at end of year)
indefinitely. If an interested buyer has a cost of money of 13 %, how much will he be willing to pay for this shopping
center?
A $6.64 million
B) $7.50 million
$5.77 million
D $2.21 million
Chapter 6 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Cash flows Reliable Electric, a major Ruritanian...Ch. 6 - Prob. 3PSCh. 6 - Prob. 4PSCh. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Real and nominal flows Restate the net cash flows...Ch. 6 - Real and nominal flows Guandong Machinery is...Ch. 6 - Working capital Each of the following statements...Ch. 6 - Prob. 9PSCh. 6 - Project NPV Better Mousetraps research...
Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Imperial Motors is considering...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Taxes and project NPV In the International Mulch...Ch. 6 - Depreciation and project NPV Suppose that Sudbury...Ch. 6 - Depreciation and project NPV Ms. T. Potts, the...Ch. 6 - Prob. 20PSCh. 6 - Prob. 21PSCh. 6 - Prob. 22PSCh. 6 - Equivalent annual cash flow Look at Problem 22...Ch. 6 - Equivalent annual cash flow Deutsche Transport can...Ch. 6 - Prob. 25PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives....Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Replacement decisions. You are operating an old...Ch. 6 - Replacement decisions. A forklift will last for...Ch. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
Knowledge Booster
Similar questions
- Your company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?arrow_forwardIf a copy center is considering the purchase of a new copy machine with an initial investment cost of $150,000 and the center expects an annual net cash flow of $20,000 per year, what is the payback period?arrow_forwardEach of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?arrow_forward
- Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forwardProject X costs $10,000 and will generate annual net cash inflows of $4,800 for five years. What is the NPV using 8% as the discount rate?arrow_forwardUse Annual Worth method to calculate the benefit/cost ratio at i = 6% for a new library. The first cost is $500K, and O&M costs are $100K per year. There is no salvage value after 30 years. Community benefits are estimated to be $130K per year. Is the library economically justified? Write a brief interpretation of your answerarrow_forward
- One university needs some maintenance. The owner of the university decides to deposit $400000 in an account next year, and estimated to increase the deposits by $50000 per year for five years thereafter, then cease. If the rate of interest is 10% what is the present worth?*arrow_forwardOne university needs some maintenance. The owner of the university decides to deposit $400000 in an account next year, and estimated to increase the deposits by $50000 per year for five years thereafter, then cease. If the rate of interest is 10% what is the present worth?* NONarrow_forwardBottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $9,000 and sell its. old washer for $2,200. The new washer will last for 6 years and save $2,700 a year in expenses. The opportunity cost of capital is 19%, and the firm's tax rate is 21%. over a 6 -year life, what are the cash flows of the project in years 0 to 6 ? What is project NPV? Note: Do not round intermediatearrow_forward
- 3. Calculate the internal rate of return for a machine that costs $550,000 and provides annual revenue of $125,000 per year for 5 years. You can assume all revenue is received once a year at the end of the year. a. Compare the IRR to the interest rate on a loan to fund the machine cost at 5.3%. Based on this information should you take on a loan to purchase this machine. Justify your answer.arrow_forwardSuppose you wish to purchase a factory that will yield an annual return of $12,000 for 12 years, after which the factory will have no value. You want to earn 8.25% annually on your investment and also set up a sinking fund to replace the purchase price. If money is placed in the fund at the end of each year and earns 4.2% compounded annually, how much should you pay for the factory? a) $81,921 b) $81,487 C)O $80,487 $80,921 e) O $82,487 Boş bırak Cevap Listesi KÖnceki 2/12 Sonraki> Карatarrow_forwardManagement of Blossom Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment will be $75,000 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV for the project? - NPV $?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub