Two machines, A and B, which perform the same functions, have the following costs and lives.
$$\begin{array} { c r r }
\text { Type } & \text { PV Costs } & \text { Life } \
\text { Machine A } & \$ 6000 & 5 \
\text { Machine B } & \$ 8000 & 7
\end{array}$$
Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.
A) Machine A as the EAC is $1789.89
B) Machine B as the EAC is $1922.88
C) Don't buy either machine
D) Accept both A and B

Question

Two machines, A and B, which perform the same functions, have the following costs and lives.
$$\begin{array} { c r r } 
\text { Type } & \text { PV Costs } & \text { Life } \
\text { Machine A } & \$ 6000 & 5 \
\text { Machine B } & \$ 8000 & 7
\end{array}$$
Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.
A) Machine A as the EAC is $1789.89
B) Machine B as the EAC is $1922.88
C) Don't buy either machine
D) Accept both A and B

Quizplus · Accepted Answer

The Equivalent Annual Cost (EAC) for Machine A is lower than that for Machine B, making Machine A the more cost-effective choice.

Two Machines, a and B, Which Perform the Same Functions