Problem 6-26 EAC and Inflation Office Automation, Inc., must choose between two
ID: 2741652 • Letter: P
Question
Problem 6-26 EAC and Inflation Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $1,300 and will last for 4 years. The copier will require a real aftertax cost of $160 per year after all relevant expenses. The RH45 costs $1,800 and will last 6 years. The real aftertax cost for the RH45 will be $135 per year. All cash flows occur at the end of the year. The inflation rate is expected to be 5 percent per year, and the nominal discount rate is 13 percent. Calculate the EAC for each copier.
Explanation / Answer
Raeal discount rate=Nominal discount rate+Inflation rate=13%+5%=18%
EAC of XX40:
EAC of RH:
Year Particulars Cash flow $ PV@18% PV of XX40 $ 0 Machine cost 1,300 1 1,300.00 1 Operating cost 160 0.8475 135.59 2 Operating cost 160 0.7182 114.91 3 Operating cost 160 0.6086 97.38 4 Operating cost 160 0.5158 82.53 Pv of XX40-1 3.6901 1,730.41 Present value of annuity factor for 4 years @185-2 3.6901 EAC-1/2 468.94