ExpertHard2 marksMultiple Choice
ACCA · Question 7 · Investment Appraisal
Section A
SkyLogistics is evaluating the replacement cycle for its new fleet of electric delivery drones.
Drone Model X costs $12,000.
If replaced after 1 year, the running costs are $2,000 and resale value is $8,000.
If replaced after 2 years, the running costs are $2,000 in year 1 and $3,500 in year 2, with a resale value of $5,000 at the end of year 2.
The company's cost of capital is 10%.
What is the Equivalent Annual Cost (EAC) of replacing the drones every 2 years? (Ignore tax and inflation).
Section A
SkyLogistics is evaluating the replacement cycle for its new fleet of electric delivery drones.
Drone Model X costs $12,000.
If replaced after 1 year, the running costs are $2,000 and resale value is $8,000.
If replaced after 2 years, the running costs are $2,000 in year 1 and $3,500 in year 2, with a resale value of $5,000 at the end of year 2.
The company's cost of capital is 10%.
What is the Equivalent Annual Cost (EAC) of replacing the drones every 2 years? (Ignore tax and inflation).
Answer options:
A.
$5,850
B.
$6,107
C.
$7,246
D.
$8,150
How to approach this question
Step 1: Calculate the Net Present Value (NPV) of costs for the 2-year cycle. Step 2: Divide the NPV by the 2-year cumulative present value annuity factor at 10%.
Full Answer
C.$7,246✓ Correct
Year 0: -$12,000.
Year 1: -$2,000 x 0.909 = -$1,818.
Year 2: (-$3,500 + $5,000) = +$1,500 x 0.826 = +$1,239.
NPV of costs = -$12,000 - $1,818 + $1,239 = -$12,579.
EAC = NPV / Annuity Factor = $12,579 / 1.736 = $7,246.
Common mistakes
Forgetting to discount the resale value, or dividing by 2 instead of the annuity factor.
Practice the full ACCA FM — Financial Management Practice Exam 1
32 questions · hints · full answers · grading
More questions from this exam
Q1**Section A**
NexusDAO is a decentralized autonomous organization transitioning into a formalize...EasyQ2**Section A**
AquaVitae is a global non-governmental organization (NGO) dedicated to providing c...EasyQ3**Section A**
VoltGrid PLC, a public utility company, is evaluating the macroeconomic environmen...MediumQ4**Section A**
EcoBuild, a sustainable construction firm, needs to raise finance. The finance dir...EasyQ5**Section A**
CryptoFlow is a digital asset exchange that needs to manage its fiat currency rese...Medium