Answer :
The equivalent annual cost of the precision lathe, considering both the initial cost and the annual operating and maintenance expenses, can be calculated using the discount rate and the lathe's expected lifespan. In this case, with a precision lathe costing $10,800, annual operating and maintenance cost of $24,000, a discount rate of 12%, and a lifespan of 5 years, the equivalent annual cost of the tool can be determined.
To calculate the equivalent annual cost, we need to account for both the initial cost and the annual operating and maintenance expenses. The formula to calculate the equivalent annual cost (EAC) is given by:
EAC = Initial Cost + (Annual Operating and Maintenance Cost / (1 + Discount Rate)^1) + (Annual Operating and Maintenance Cost / (1 + Discount Rate)^2) + ... + (Annual Operating and Maintenance Cost / (1 + Discount Rate)^n)
In this case, the initial cost of the precision lathe is $10,800, the annual operating and maintenance cost is $24,000, the discount rate is 12%, and the lifespan is 5 years. Plugging these values into the formula, we can calculate the equivalent annual cost.
EAC = $10,800 + ($24,000 / (1 + 0.12)^1) + ($24,000 / (1 + 0.12)^2) + ($24,000 / (1 + 0.12)^3) + ($24,000 / (1 + 0.12)^4) + ($24,000 / (1 + 0.12)^5)
Simplifying this expression will give us the equivalent annual cost of the precision lathe, rounded to 2 decimal places.
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