Answer to Question #320613 in Mechanical Engineering for Jhonny

Question

2.) A businessman is faced with the prospect of fluctuating future budget for the maintenance of the

generator. During the first 5 years, P1,000 per year will be budgeted. During the second five

years, the annual budget will be P1,500 per year. In addition, P3,500 will be budgeted for an

overhaul of the machine at the end of the fourth year and another P3,500 for an overhaul at the

end of 8th year. Assuming compound interest at 6% per annum, what is the equivalent annual cost

of maintenance?

Ans. P1,888.87

Answer 1

Equivalent annual cost (EAC) is the annual cost of owning and maintaining an asset determined by dividing the net present value of the asset purchase, operations and maintenance cost by the present value of annuity factor. It is a capital budgeting tool used by companies to compare assets with unequal useful lives.