ACCA · Question 04 · Investment Appraisal
Section A
TerraFirma Mining needs to replace its heavy excavation machinery. The machinery can be replaced every 2 years or every 3 years. The cost of capital is 10%.
2-year cycle: PV of costs = $145,000
3-year cycle: PV of costs = $205,000
Annuity factors at 10%: 2 years = 1.736, 3 years = 2.487
Based on the Equivalent Annual Cost (EAC), which replacement cycle should be chosen and what is its EAC?
Answer options:
2-year cycle with an EAC of $83,525
3-year cycle with an EAC of $82,429
2-year cycle with an EAC of $72,500
3-year cycle with an EAC of $68,333
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