Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $104,000, has a...

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Bridgton Golf Academy is evaluating new golf practice equipment.The "Dimple-Max" equipment costs $104,000, has a 5-year life, andcosts $8,900 per year to operate. The relevant discount rate is 10percent. Assume that the straight-line depreciation method is usedand that the equipment is fully depreciated to zero. Furthermore,assume the equipment has a salvage value of $7,900 at the end ofthe project’s life. The relevant tax rate is 22 percent. All cashflows occur at the end of the year.
What is the equivalent annual cost (EAC) of this equipment? (Anegative amount should be indicated by a minus sign. Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

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4.5 Ratings (847 Votes)

Time line		0	1	2	3	4	5



Cost of new machine		-104000

=Initial Investment outlay		-104000


Sales			0	0	0	0	0
Profits	Sales-variable cost		-8900	-8900	-8900	-8900	-8900


-Depreciation	Cost of equipment/no. of years		-20800	-20800	-20800	-20800	-20800

=Pretax cash flows			-29700	-29700	-29700	-29700	-29700
-taxes	=(Pretax cash flows)*(1-tax)		-23166	-23166	-23166	-23166	-23166
+Depreciation			20800	20800	20800	20800	20800
=after tax operating cash flow			-2366	-2366	-2366	-2366	-2366



+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						6162
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							6162

Total Cash flow for the period		-104000	-2366	-2366	-2366	-2366	3796
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051
Discounted CF=	Cashflow/discount factor	-104000	-2150.90909	-1955.372	-1777.611	-1616.01	2357.0173
NPV=	Sum of discounted CF=	-109142.8843

EAC	-28791.61793
Year or period		0	1	2	3	4	5
EAC			-28791.6179	-28791.62	-28791.62	-28791.62	-28791.62
Discount factor=	(1+discount rate)^corresponding period		1.1	1.21	1.331	1.4641	1.61051
Discounted CF=	Cashflow/discount factor		-26174.1981	-23794.73	-21631.57	-19665.06	-17877.33
NPV=	-109142.8843
EAC is equivalent yearly CF with same NPV =	-28791.62

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Bridgton Golf Academy is evaluating new golf practice equipment.The "Dimple-Max" equipment costs $104,000, has a 5-year life, andcosts $8,900 per year to operate. The relevant discount rate is 10percent. Assume that the straight-line depreciation method is usedand that the equipment is fully depreciated to zero. Furthermore,assume the equipment has a salvage value of $7,900 at the end ofthe project’s life. The relevant tax rate is 22 percent. All cashflows occur at the end of the year.What is the equivalent annual cost (EAC) of this equipment? (Anegative amount should be indicated by a minus sign. Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)