CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions
Sundaram Textiles is evaluating a machine costing ₹2,00,000 with annual operating cost of ₹50,000 at the end of each year. The machine lasts 3 years with no salvage value. The cost of capital is 10% and the 3-year annuity factor is 2.4869. What is the equivalent annual cost (EAC) of the machine?
The EAC is about ₹1,30,421. Present value of all costs is ₹3,24,345 (₹2,00,000 plus ₹50,000 discounted for three years at 10%), and dividing by the 3-year annuity factor of 2.4869 converts it into an equivalent annual cost.
- A₹1,08,115
- B₹1,30,421Correct
- C₹1,24,345
- D₹3,24,345
Explanation
PV of costs = 2,00,000 + 50,000 × 2.4869 = 3,24,345. EAC = 3,24,345 ÷ 2.4869 ≈ ₹1,30,421. Dividing the PV by 3 (₹1,08,115) ignores the time value of money, and ₹3,24,345 is the PV of costs, not an annual figure.
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