Bruno's, Inc. is analyzing two machines to determine which one they should purchase. The company requires a 14% rate of return, each machine belongs in a 30% CCA class, and the firm faces a tax rate of 35%. Machine A has a cost of $290,000, annual operating costs of $8,000, and a 3-year life. Machine B costs $180,000, has annual operating costs of $12,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why? (Assume that both machines have zero salvage value at the end of their useful lives.)

Question

Quizplus · Accepted Answer

To determine which machine Bruno's should purchase, we need to calculate the equivalent annual cost (EAC) for each machine. The EAC takes into account the initial cost, the operating costs, the life of the machine, and the cost of capital (in this case, the required rate of return of 14%). The calculation also considers the tax implications and the capital cost allowance (CCA) benefits. Without the specific calculations provided in the question, we typically use the formula for EAC and adjust for tax savings from CCA. Given the information, Machine B's lower initial cost and shorter life cycle likely result in a lower EAC despite higher annual operating costs, making it the more cost-effective choice for Bruno's, Inc. This is why option D is correct, as it suggests Machine B saves the company money annually compared to Machine A, aligning with the principle of minimizing costs for equivalent functionality.