Skip to content

ACCA Applied Skills · Financial Management · Specific investment decisions (lease or buy, asset replacement, capital rationing)

Belmont Ltd is considering a machine with a present value of costs of $50,000 over a 4-year life. The cost of capital is 10% and the 4-year annuity factor at 10% is 3.170. What is the equivalent annual cost (EAC) of the machine, to the nearest dollar?

The EAC is $15,773. It is found by dividing the present value of costs, $50,000, by the four-year annuity factor at 10%, 3.170. This converts the total cost into a constant annual cost that allows for the time value of money.

  1. A$15,773Correct
  2. B$12,500
  3. C$5,000
  4. D$158,500

Explanation

EAC = PV of costs divided by the annuity factor for the machine's life: 50,000 / 3.170 = $15,773. Dividing by 4 (12,500) ignores the time value of money. Multiplying by the annuity factor (158,500) uses the factor the wrong way round.

Did you get it right without looking?

One question tells you little. A timed set on Specific investment decisions (lease or buy, asset replacement, capital rationing) shows your real accuracy, how long you take and where you lose marks.

Practise Specific investment decisions (lease or buy, asset replacement, capital rationing)Free diagnostic mock

More Specific investment decisions (lease or buy, asset replacement, capital rationing) questions