Question 1

**Section A**

OreCrush Mining is deciding on the replacement cycle for its heavy excavators. A new excavator costs $200,000. If replaced every 4 years, the present value of all costs (initial purchase, maintenance, and scrap value) discounted at the company's cost of capital of 8% is $250,000.

The 4-year cumulative annuity factor at 8% is 3.312.

What is the Equivalent Annual Cost (EAC) of replacing the excavator every 4 years?

Accepted Answer

To find the Equivalent Annual Cost (EAC), divide the total Present Value of all costs over the cycle by the cumulative annuity factor for the cycle length.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Dividing the initial cost ($200,000) by the annuity factor instead of the total PV of costs ($250,000), or simply dividing the PV by the number of years (4) without using the annuity factor.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

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