Question

Country Breads uses specialized ovens to bake its bread. One oven costs $249,000 and lasts about 15 years before it needs to be replaced. The annual operating cost per oven is $34,300. What is the equivalent annual cost of an oven if the required rate of return is 14 percent?
(A) -$74.839.43
(B) -$48,349.72
(C) -$82,800.19
(D) $50,560.08
(E) -$28,729.77

Answer 1

Answer:

The equivalent annual cost of an oven is $(A) - 74.839.43$

Explanation:

Hi

Known Data

Operating cost=$OC=\ 34,300$,$n=15, VP=\ 249,000$ and $i=14\%$

Computing total cost per year

We are going to use the formula below with the known data.

$A=\frac{VP}{\frac{1-(1+i)^{-n}}{i} } =\frac{249000}{\frac{1-(1+0.14)^{-15}}{0.14} }=40539.43$. Then this is the fixed amortization cost per year.

Finally, we sum the fixed amortization cost per year and the operating cost:

Total cost per year=$TCPY=A+OC=\ 40,539.43+\ 34,300=\ 74,839.43$, therefore the answer is  $(A) - 74.839.43$