Equivalent Annual Cost
Zoysia University must purchase mowers for its landscape department. The university can buy 10 EVF mowers that cost $8,500 each and have annual, year-end maintenance costs of $1,800 per mower. The EVF mowers will be replaced at the end of Year 4 and have no value at that time. Alternatively, Zoysia can buy 11 AEH mowers to accomplish the same work. The AEH mowers will be replaced after three years. They each cost $5,300 and have annual, year-end maintenance costs of $2,300 per mower. Each AEH mower will have a resale value of $800 at the end of three years. The university’s opportunity cost of funds for this type of investment is 9 percent. Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future mowers. Would you recommend purchasing 10 EVF mowers or 11 AEH mowers?