Question

A company can purchase a piece of equipment for Rs 4,000,000 and sell it for Rs 800,000 at the end of 6-year service life, or it can lease the unit for the same period by making a first of the year payment of Rs 600,000. Compare the equivalent annual costs of the alternatives, using an interest rate of 15 percent.

Answer 1

The equivalent annual costs of the alternatives are:

EAC1 = (4,000 - 800)/6 = 533.33,

EAC2 = 600.