The Equivalent Annual Cost Method Allows Comparison of the Costs

question 42

Essay

The Equivalent Annual Cost method allows comparison of the costs of equipment with unequal lives. If Quick-roll machine has an eleven year life, and an NPV of $2,100, while the Zip-roller machine has a seven year life and an NPV of $2,000. Which machine would you choose if the business is expected to continue and the discount rate for both is 14%?

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Definitions:

Ketones

Organic compounds characterized by the presence of a carbonyl group (C=O) bonded to two other carbon atoms, important in many biochemical processes and industrial applications.

Ethers

A group of organic substances identified by the presence of an oxygen atom linked to two alkyl or aryl groups.

Ester Functional Group

A chemical functional group derived from an acid where at least one –OH (hydroxyl) group is replaced by an –O– (oxy) group.

Ketone Group

A functional group in organic chemistry characterized by a carbon atom double-bonded to an oxygen atom, with two other carbon atoms attached.