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Equivalent Annual Cost

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? Equivalent Annual Cost. Econo-Cool air conditioners cost $300 to purchase, result in electricity bills of $150 per year, and last for 5 years. Luxury Air models cost $500, result in electricity bills of $100 per year, and last for 8 years. The discount rate is 21 percent.
1. What are the equivalent annual costs of the Econo-Cool and Luxury Air models?
2. Which model is more cost-effective?
3. Now you remember that the inflation rate is expected to be 10 percent per year for the foreseeable future. Redo parts (a) and (b).

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1. What are the equivalent annual costs of the Econo-Cool and Luxury Air models?

The equivalent annual cost is the cost per year to operate the model. The costs of operating the models is the annual electricity bill and the cost of the air conditioner. The annual electicity bill is an annutl cost itself. The initial cost is paid at the start and that we should convert to equivalent annual cost (EAC). The EAC is an ...

Solution Summary

The solution explains how to calculate the equivalent annual cost and decide which model is more cost effective

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See Also This Related BrainMass Solution

Calculating equivalent annual cost: aging storage tank

An 8 year old storage tank has to be replaced or repaired because of severe corrosion. You have been asked to investigate three alternatives

Replace tank to original specifications.

-Repair tank with stainless steel lining.

-Replace tank with stainless steel tank.

You have obtained the following information: Shut down time allowed 10 days, each day over the 10 day period costs the company $5000 in lost revenue.

Material and fabricating costs for STEEL TANK $50000, Installation cost $20000, Time required for installation is 8 days, life span is 8 years, annual maintenance cost is $2000, salvage value is zero.

Material and fabricating costs for STAINLESS STEEL LINING $35000, Installation cost $30000, Time required for installation is 12 days, life span is 12 years, annual maintenance cost is $1000, salvage value is zero.

Material and fabricating costs for STAINLESS STEEL TANK $75000, Installation cost $25000, Time required for installation is 10 days, life span is 16 years, annual maintenance cost is zero, salvage value is $5000.

For a minimum attractive rate of return of 12%, which is the most economical alternative?

(Use equivalent annual cost method)

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