Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be replaced. The annual operating cost per oven is $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

A. -$272,638

B. -$248,313

C. -$232,407

D. -$200,561

E. $196,210

Question

Business

Leland

8 August, 21:34

Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be replaced. The annual operating cost per oven is $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

A. -$272,638

B. -$248,313

C. -$232,407

D. -$200,561

E. $196,210

+5

Answers (1)

Know the Answer?

Chessie · Answer 1

A. -$272,638

Explanation:

Firstly, we need to calculate the total present value of initial investment plus all operating cost of the project. Then we will use that amount to solve for equal-amount annual operating cost.

Total present value of the project is - 689,000 - 41,000 / (1+13%) - 41,000 / (1+13%) ^2 + ... + 41,000 / (1+13%) ^4, or - 810,953.32 (negative sign mean cost).

So, the equivalent annual cost of an oven is - 272,638.

The equation solving problem can be made easily using Excel or BA II plus calculator.