Show Sushi in San Dimas is trying to decide if paying $125,000 for a new rice...
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"Show Sushi" in San Dimas is trying to decide if paying $125,000 for a new rice maker is worth it. Once the rice maker's 6-year economic life is over, the restaurant would then sell it for an estimated $9,300 (this is not "after-tax salvage value"!) and immediately buy the same identical but brand new rice maker for the same purchase price as it paid for the first rice maker. When that rice maker's life is over, it would sell it and buy a new rice maker again. And so on, over and over, forever. (Assume both the purchase and the resale prices will never change in the future.) Here's what else we know about these rice makers: • The annual operating cost is $9,600. The rice makers follow straight-line depreciation method, and the remaining book value reaches exactly zero at the end of each rice maker's economic life. Also: The company pays 24 percent tax rate on its annual taxable income. The discount rate of 9 percent is appropriate for this "infinite" rice maker project. • As always, assume that all future cash flows occur at year end. Calculate the implied average, or equivalent, annual cost (EAC) of the rice maker. (Since cost is a cash outflow, a negative dollar amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) EAC "Show Sushi" in San Dimas is trying to decide if paying $125,000 for a new rice maker is worth it. Once the rice maker's 6-year economic life is over, the restaurant would then sell it for an estimated $9,300 (this is not "after-tax salvage value"!) and immediately buy the same identical but brand new rice maker for the same purchase price as it paid for the first rice maker. When that rice maker's life is over, it would sell it and buy a new rice maker again. And so on, over and over, forever. (Assume both the purchase and the resale prices will never change in the future.) Here's what else we know about these rice makers: • The annual operating cost is $9,600. The rice makers follow straight-line depreciation method, and the remaining book value reaches exactly zero at the end of each rice maker's economic life. Also: The company pays 24 percent tax rate on its annual taxable income. The discount rate of 9 percent is appropriate for this "infinite" rice maker project. • As always, assume that all future cash flows occur at year end. Calculate the implied average, or equivalent, annual cost (EAC) of the rice maker. (Since cost is a cash outflow, a negative dollar amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) EAC
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Equivalent Annual Cost EAC The equivalent annual cost EAC is the cost of a... View the full answer
Related Book For
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
Posted Date:
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