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3 August, 21:21

An company buys a color printer that will cost $18,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 12%? A. - $3983 B. - $4002 C. - $4957 D. - $5493

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  1. 3 August, 21:41
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    The correct answer is option (D)

    Explanation:

    Solution

    Given that:

    The present value of equity factor for 5 years at 12% discount are = 3.60478

    Then,

    The present value of servicing costing = - $500 * 3.60478 = - $1802.39

    Thus,

    The present value of cost to buy = - $18000

    The total Present value = - 18000 + 1802.39 = - $19802.39

    So,

    The equivalent annual annuity = total Present value / present value of equity factor

    = - $19802.39 / 3.60478

    = - $5493.37

    Therefore, the equivalent annual annuity of this deal is - $5493.37
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