Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10 percent? (Round your answer to whole dollars.)

Question

Mathematics

Bianca Pittman

31 May, 13:56

Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10 percent? (Round your answer to whole dollars.)

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Answers (1)

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Skye Booth · Answer 1

THe expected annual cost is $282200

Step-by-step explanation:

We should take the base cost and sum it by the anual cost multiplied by 3, because the lifetime of the machines is 3 years. Since the expected return is 10%, then we have to multiply the result by 1.1, therefore

cost = (750000+12000*3) * 1.1 = $864600

Now, we divide this by 3 to obtain the annual cost

Annual cost = 864600/3 = $288200