What is the equivalent annual cost in years 1 through 8 of a

What is the equivalent annual cost in years 1 through 8 of a contract that has a first cost of $75,000 in year 0 and annual costs of $19,000 in years 3 through 8? Use an interest rate of 9% per year. The equivalent annual cost is determined to be $ ___ .

Solution

Present worth (PW) of costs ($) = 75,000 + 19,000 x P/A(9%, 6) x P/F(9%, 2)

= 75,000 + 19,000 x 4.4859** x 0.8417** = 75,000 + 71,738.15 = 146,738.15

Equivalent annual cost ($) = PW of costs / P/A(9%, 8) = 146,738.15 / 5.5348** = 26,511.92