DeCento's is analyzing two mutually exclusive machines to determine which one it should purchase.Whichever machine is purchased,it will be replaced at the end of its useful life.The company requires a return of 15 percent and uses straight-line depreciation to a zero book value over the life of the machine.Machine A has a cost of $386,000,annual operating costs of $29,000,and life of 4 years.Machine B costs $257,000,has annual operating costs of $19,000,and a life of 3 years.The firm currently pays no taxes.Which machine should be purchased and why?

Question

Quizplus · Accepted Answer

PV_Cost, _A = $386,000 + $29,000[(1 − 1 / 1.15⁴)/ 0.15] = $468,794.37 $468,794.37 = EAC[(1 − 1 / 1.15⁴)/ 0.15] EAC = $164,202.43 PV_Cost, _B = $257,000 + $19,000[(1 − 1 / 1.15³)/ 0.15] = $300,381.28 $300,318.28 = EAC[(1 − 1 / 1.15³)/ 0.15] EAC = $131,560.08 Difference in EAC_A-B = $164,202.43 − $131,560.08 = $32,642.35 Machine B has the lower equivalent annual cost,so it should be purchased.

DeCento's Is Analyzing Two Mutually Exclusive Machines to Determine Which