Champion Bakers uses specialized ovens to bake its bread. One oven costs $840,000 and lasts about 3 years before it needs to be replaced. The annual operating cost per oven is $10,000. What is the equivalent annual cost of an oven if the required rate of return is 11 percent? (Round your answer to whole dollars)

$347,769.72

Explanation:

yearly expense = present estimation of all expenses/PVAF(r,n)

PVAF or present worth annuity factor is the aggregate of limiting elements at a given occasional rate r for n number of periods .

Identical Annual Cost  

= 864,868.52/PVAF(10%,3 years)  

= 864,868.52/2.4869  

= $347,769.72

$353741

Explanation:

A =( 1 + (1/(1+r))^t/r

A = Annuity factor

r = cost of capital = 11/100 = 0.11

t = period = 3

A = (1+(1/1+0.11))^3/0.11

A = 2.4437

Principal cost/ annuity factor

840000/2.4437 = $343741.046

annual operating cost per oven is $10,000.

$343741.046 + $10,000 = $353741.046

In Whole number

$353741

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