Calculate equivalent annual cost to compare assets with unequal lives.
Machine A costs $420K, lasts 3 years, and has $95K annual maintenance. Machine B costs $610K, lasts 6 years, has $55K annual maintenance, and a $90K resale value. The discount rate is 9%. EAC = present value of total ownership cost divided by the annuity factor for the asset life. The common shortcut is to pick Machine A because the purchase price is $190K lower. That ignores life, maintenance, and resale value. Step 1 Machine A PV cost = $420K + PV of $95K for 3 years at 9% = about $660.6K. A has no residual value in the estimate,…
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