Q5) Bridgton Golf Academy is evaluating new golf practice equipment. The \"Dimpl
ID: 2782920 • Letter: Q
Question
Q5) Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $102.000, has a 5 year life, and costs S9,400 per year to operate. The relevant discount rate is 15 percent. Assume that the straight-line depreciation method is used and that the equipment is fully depreciated to zero. Furthermore, assume the equipment has a salvage value of $22,000 at the project's life. The relevant tax rate is 38 percent. All cash flows occur at the end of the year. What is the equivalent annual cost (EAC) of this equipment? (10 pts)Explanation / Answer
EAC i.e. Equivalent annual cost = [Equipment cost - Total Present value of future cash flows]/Annuity factor @ 15% for 5 years Calculation of present value of future cash flow Year 1 2 3 4 5 Total present value of cash flows Operating cost -$9,400.00 -$9,400.00 -$9,400.00 -$9,400.00 -$9,400.00 Tax saving on Operating cost @ 38% $3,572.00 $3,572.00 $3,572.00 $3,572.00 $3,572.00 Tax saving on Depreciation cost @ 38% $6,080.00 $6,080.00 $6,080.00 $6,080.00 $6,080.00 Salvage Value of equipment $22,000.00 Tax on salvage value at 38% -$8,360.00 Net Cash flow $252.00 $252.00 $252.00 $252.00 $13,892.00 Discount factor @ 15% 0.8695652 0.7561437 0.6575162 0.5717532 0.4971767 Present Values $219.13 $190.55 $165.69 $144.08 $6,906.78 $7,626.23 Equipment Depreciation per year = (Cost - salvage value)/useful life = ($102000 - $22000)/5 = $16,000 Tax saving on depreciation per year = $16000 * 38% = $6080 EAC i.e. Equivalent annual cost = [$102000 - $7626.23] / 3.35216 = $28,153.16
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