What is the equivalent annual cost in year 1 through 7 of a

What is the equivalent annual cost in year 1 through 7 of a contract that has a first cost of $80,000in year 0 and annual costs of $12,000 in year 3 through 7? Use an annual interest rate of 10% per year.   

Solution

Equivalent annual cost = 80,000(A/P, 10%, 7) + 12,000

= 80,000(0.2054) + 12,000

= 16,432 + 12,000

= $28,432