Evaluate equivalent annual cost, Financial Accounting

Assignment Help:

Q. Evaluate Equivalent annual cost?

There are a number of techniques to answering this question and two are presented. The first difficulty is in deciding which broad approach to use. The broad approach which appears best is to inflate the cash flows at their different inflation rates and to discount at the money discount rate. Using this wider approach the lowest common multiple method would look like

The lowest common multiple is 2 × 3 = 6 years therefore the cash flows for each of the alternatives will be presented in these terms.

2 year cycle: (cash flows are overstated according to their individual inflation rates)

2316_Evaluate Equivalent annual cost.png

3 year cycle: (cash flows are overstated according to their individual inflation rates)

552_Evaluate Equivalent annual cost2.png

Therefore a two year replacement cycle is preferable since it represents the lowest cost.

On the other hand an equivalent annual cost approach could be used

2 year cycle: (cash flows are overstated according to their individual inflation rates)

280_Evaluate Equivalent annual cost3.png

Equivalent annual cost = 12705/ (annuity factor at 15% for two years) = 12705/1·626 = 7813

3 year cycle (cash flows are inflated according to their individual inflation rates)


Related Discussions:- Evaluate equivalent annual cost

Pre-acquisition dividends, Pre-acquisition dividends Pre-acquisition di...

Pre-acquisition dividends Pre-acquisition dividends may also arise in the following situations; 1 ) Where the holding company acquires the subsidiary company’s shares cum-div

Deferred tax-income tax-financial statement, Deferred tax A company may e...

Deferred tax A company may enter into transactions in the current financial period that may result in the firm either paying or saving some tax in the future. The tax that may be

Use the multi factor productivity ratio, Alyssa's Custom Cakes currently se...

Alyssa's Custom Cakes currently sells 5 birthday, 2 wedding, and 3 specialty cakes each month for $50, $150, and $100 each, respectively.. The cost of labor is $50 per hour includi

accounting, what organizations are responsible for governing financial rep...

what organizations are responsible for governing financial reporting? what is the role of each organiztion? how have the roles changed in the last 20 years? how might their roles c

Recording and Reporting Equity, Camp Corp had the following balances in its...

Camp Corp had the following balances in its stockholders'' equity at jan 1: Common stock, $2, par value, 450,000 shares issued $900,000 Additional pd in capial 1,200,000 Retained

Mark up-branches, Mark up Mark up is defined as the rate of gross profi...

Mark up Mark up is defined as the rate of gross profit to cost of sales: Mark up = Gross Profit                Cost of sales Margin is defined as the rate of gros

Explain how firms may use their capital structure, Following the lines of t...

Following the lines of the model by Ross (1977): I. Explain how firms may use their capital structure to generate a signal that conveys credible information about their future

EDP, For what EDP is using in accounting

For what EDP is using in accounting

What would be the consequences to zorn, zorn conducted his professional pra...

zorn conducted his professional practice through zorn, inc. the corporation uses a fiscal year ending september 30 even though the business purpose test for a fiscal year cannot be

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd