Calculate the equivalent annual cost, Cost Accounting

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A plant is considering the replacement of a piece of equipment in its materials handling system with a new piece. If the company's cost of capital is 10%. Should the present asset be kept or replaced ?. state your recommendation. { TIP: calculate the EAC (Equivalent annual cost) of each of the two options } the following data are provided:

Present asset

Present salvage value : $10.000

Economic life : 1 Year

Next Year's operating and maintenance costs: $51,000

Salvage value in one year: $5,000

Replacement alternative

Capital cost: $200.000

Economic Life: 8 years

Operating and maintenance costs:

Years 1-2: $15,000 per year

Years 3-4: $20,000 per year

Years 5-6: $25,000 per year

Years 7-8: $30,000 per year

Salvage value in 8 years : 25,000

Note: all calculations are approximated to the nearest $100 Option A= keep the old piece of equipment for one more year Option B= buy the new piece and sell the old piece of equipment


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