DeCento's is analyzing two machines to determine which one it should purchase.Whichever machine is purchased will be replaced at the end of its useful life.The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine.Machine A has a cost of $276,000,annual operating costs of $18,000,and a 3-year life.Machine B costs $220,000,has annual operating costs of $22,000,and a 2-year life.The firm currently pays no taxes.Which machine should be purchased and why?

Question

Quizplus · Accepted Answer

NPV_Cost, _A = $276,000 + $18,000[(1 - 1/1.12³)/.12] = $319,232.96$319,232.96 = EAC[(1 - 1/1.12³)/.12]EAC = $132,912.32NPV_Cost, _B = $220,000 + $22,000[(1 - 1/1.12²)/.12] = $257,181.12$257,181.12 = EAC[(1 - 1/1.12²)/.12]EAC = $152,173.58Difference (A - B)= $132,912.32 - $152,173.58 = -$19,261.26Machine A has the lower annual cost,so it should be purchased.

DeCento's Is Analyzing Two Machines to Determine Which One It