You have been asked to evaluate 2 pollution control devices. The wet scrub costs $100 to set up and $50 per year to operate. It must be completely replaced every 3 years, and it has no salvage value. The dry scrub device costs $200 to set up and $30 per year to operate. It lasts for 5 years and has no salvage value. Assuming that pollution control equipment is replaced as it wears out, which method do you recommend if the cost of capital is 10%?
A) Dry scrub, the EAC is $11.00.
B) Wet scrub, the EAC is $90.21.
C) Dry scrub, the EAC is $82.76.
D) Wet scrub, the EAC is $9.79.
E) Dry scrub, the EAC is $124.34.

Question

Quizplus · Accepted Answer

The Equivalent Annual Cost (EAC) is calculated to compare the cost-effectiveness of the devices. For the dry scrub, the EAC is calculated using the formula: EAC = (Initial Cost * (r / (1 - (1 + r)^-n))) + Operating Cost, where r is the discount rate and n is the lifespan. The dry scrub has a lower EAC of $82.76, making it the more cost-effective choice.

You Have Been Asked to Evaluate 2 Pollution Control Devices