You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:
A) longest life.
B) highest annual operating cost.
C) lowest annual operating cost.
D) highest equivalent annual cost.
E) lowest equivalent annual cost.

Question

Quizplus · Accepted Answer

When comparing machines with differing initial and ongoing costs and differing lives, the best choice is determined by calculating the equivalent annual cost (EAC) for each machine. EAC takes into consideration capital costs, operating costs, and salvage value over the life of the machine. The machine with the lowest EAC is the most cost-effective choice. Therefore, the answer is the choice with the lowest equivalent annual cost (E).

You Are Considering the Purchase of a New Machine