ABC company is considering the purchase of a new smoker over for cooking barbecu
ID: 2646887 • Letter: A
Question
ABC company is considering the purchase of a new smoker over for cooking barbecue, ribs, and wings. It is looking at two different ovens. The first is a relatively standard smoker and would cost $51,000, last for 9 years, and produce annual cash flows of $15,000 per year. The alternative is the deluxe, award winning smoke-alator, which costs $77,000 and, because of its patented humidity control, produces the "moistest, tastiest barbecue in the world". The smoke-alator would last for 11 years and produce cash flows of $24,000 per year. Assuming a required rate of return of 8 percent on both projects, compute their equivalent annual annuity (EAA).
The EAA of the standard smoker is?
Explanation / Answer
Standard smoker
Equivalent annual annuity (EAA) = 15000 - 51000/PVIFA(8%,9)
Equivalent annual annuity (EAA) = 15000 - 51000/6.246888
Equivalent annual annuity (EAA) = $ 6835.93
Deluxe, award winning smoke-alator
Equivalent annual annuity (EAA) = 24000 - 77000/PVIFA(8%,11)
Equivalent annual annuity (EAA) = 24000 - 77000/7.138964
Equivalent annual annuity (EAA) = $ 13,214.12