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Annual Cost of Equipment with Salvage

Mediumannual worthcapital recovery
A loader costs $200,000, lasts 20 years and has a $20,000 salvage value. At 7% interest, its equivalent annual cost of ownership is most nearly:
  1. A$10,000
  2. B$18,879
  3. C$19,366
  4. D$18,391
Show solution

Answer: D. $18,391

Equation: equivalent annual cost = P(A/P, i, n) − S(A/F, i, n). Values: first cost P = $200,000, salvage S = $20,000 at year 20, i = 7%, n = 20. Step 1: (A/P, 7%, 20) = 0.09439, so 200,000 × 0.09439 = $18,879. Step 2: (A/F, 7%, 20) = 0.02439, so 20,000 × 0.02439 = $488. Step 3: A = 18,879 − 488 = $18,391. $10,000 ignores interest; $18,879 ignores salvage; $19,366 adds salvage instead of subtracting.
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