Purchase Solution

Decision Making-EAC method

Not what you're looking for?

Ask Custom Question

Ambuja University must purchase word processors that cost INR 8,000 each and have annual, year-end maintenance costs of INR 2,000 per machine. The EVF word processors will be replaced at the end of year 4 and have no value at that time.
Alternatively, Ambuja can buy 11 AEH word processors to accomplish the same work. The AEH word processors will be replaced after three years.They each costs INR 5,000 and have annual, year-end maintenance costs of 2,500 per machine.
Each AEH word processor will have a resale value of INR 500 at the end of three years.

The university's opportunity cost of funds for this type of investment is 14 percent. Because the university is a nonprofit institution, it does not pay taxes.

It is anticipated that whichever manufacturer is chosen now will be the supplier of future machines.
Would you recommend purchasing 10 EVF word processors or 11 AEH machines?

Attachments
Purchase this Solution
Solution Summary

Solution describes the steps for choosing an investment alternative based upon equivalent annual cost method.

Solution Preview

Please refer attached file for better clarity of tables and formulas.

Soution:

Let us first find NPV for EVF word processors

Cost 10 units @ INR 8000 each=80000 INR
Annual maintenance cost @ INR 2000 each= 20000 INR
Value at the end of 4th year=0 INR
Useful life=4 years
Cash Flows
Year End Cost Maintenance Net Cash Flow PV @14%
0 -80000 -80000 80000/1.14^0=-80000
1 -20000 -20000 20000/1.14^1=-17544
2 -20000 -20000 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

View More Free Quizzes
Related BrainMass Solutions

  • Depreciation Methods for a New Capital Project

    Question C: EAC = $73,285/[(1-1/(1.11)^7)/0.11] = $15,552.20 This solution discusses using NPV for making capital project decisions in 130 words with calculations for equivalent annual cost.

  • Project Management and Frequency Updates of EAC and ETC

    There are three methods to calculate EAC o Variances are Typical - This method is used when the variances at the current stage are typical and are not expected to occur in the future.

  • Finance Questions

    Assuming pollution control equipment is replaced as it wears out, which method do you recommend if the cost of capital is 10%? Determine the equivalent annuity cost (EAC) and show your decision by marking your choice.

  • Cumulative CPI and EAC

    Problem: Using the Cumulative CPI method to compute the IEAC, which of the following choices indicates that the EAC is most likely understood? a) The VAC is times > and the cumulative CV and the CA is 50% complete.

  • Alternative and Equivalent Annual Cost Method

    In equivalent annual cost (EAC) method, we find the present value of all the costs and then convert this present value to an annuity which has the same present value. The annuity amount is called as equivalent annual cost (EAC).

  • equivalent annual cost over machine life calculation example

    Justify your decision. The two machines are mutually exclusive and the cost of capital is 15%.

  • ROI

    * For revenue-related benefits look for faster time to market, better management decision-making, improved inventory control and churn.

  • The cumulative CPI for calculating an EAC

    Problem: If BCWS = 60, BCW=50, ACWP=40, and BAC=100, the cumulative CPI method for calculating an IEAC would result in an EAC of? Note: I believe that you had a typo for BCWS instead of BCWP. BCWP is needed to calculate CPI.

  • Jazzmaster vs Discmaster Sound Mixer: Computer EAC

    Ignoring depreciation and taxes, compute the EAC for both. Which do you prefer? To use this method, calculate the PV of each machine at date 0, and express the calculated PV as annuity equivalent for the machine's life time.

  • Replacement of an asset

    of the old computer is: EAC = -152,571.45/1.7355 = -87,912.10 The better option is the one that has the lower EAC.

View More Related Solutions