Office Automation, Inc., must choose between two copiers, the XX40 or the RH45.

Question

Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $1,900 and will last for 4 years. The copier will require a real aftertax cost of $220 per year after all relevant expenses. The RH45 costs $2,400 and will last 6 years. The real aftertax cost for the RH45 will be $195 per year. All cash flows occur at the end of the year. The inflation rate is expected to be 6 percent per year, and the nominal discount rate is 13 percent.

     
      Calculate the EAC for each copier.

XX40 :

RH45 :

Which one should the copier choose?

Explanation / Answer

XX40 :

Which one should the copier choose

What is the real discount rate? 0.13 x (1 - 0.06) = 0.52 %

NPV: 1,900 + (220 x 4) = 1,500 + 360 = -2780

EAC = NPV/annuity factor =

annuity factor = (1 - (1 + 0.052)^-4))/(0.052) = 3.529

So EAC = 2780/3.529 = -787.75 = EAC

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