You are evaluating two different machines. Machine A costs $25,000, has a five-year life, and has an annual OCF (after tax) of -$6,000 per year. Machine B costs $30,000, has a seven-year life, and has an annual OCF (after tax) of -$5,500 per year. If your discount rate is 10 percent, using EAC which machine would you choose?

Question

Quizplus · Accepted Answer

To determine which machine to choose, we need to calculate the EAC (Equivalent Annual Cost) of both machines.

EAC for Machine A: 
PV = -$25,000 
N = 5 
I/Y = 10

CF = $6,000 (since it is negative OCF) 
CPT → PMT = $6,265.81

EAC for Machine A = $6,265.81

EAC for Machine B: 
PV = -$30,000 
N = 7 
I/Y = 10

CF = $5,500 (since it is negative OCF) 
CPT → PMT = $6,943.22

EAC for Machine B = $6,943.22

Since the EAC of Machine A is lower than that of Machine B, we should choose Machine A. However, in this case, the EAC of Machine B is lower than that of Machine A which means Machine B is the better choice. Therefore, the answer is B.

You Are Evaluating Two Different Machines