You are evaluating two different machines.Machine A costs $10,000,has a five-year life,and has an annual OCF (after tax)of −$2,500 per year.Machine B costs $15,000,has a seven-year life,and has an annual OCF (after tax)of −$2,000 per year.If your discount rate is 14 percent,using EAC which machine would you choose?

Question

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One iteration of each machine will consist of the following cash flows:
 11ea8218_293b_9cce_bbd8_5543f8434bec_TB1326_00 The NPV of one Machine A will be: PMT= 2,500, N= 5, I = 14, FV= 0, PV = −8,582.70 −8,582.70 − 10,000 = −18,582.70. Treating this as the present value of a 5-period annuity, setting i to 14 percent, and solving for payment will yield a payment of −$5412.83, which is machine A's EAC. The NPV of Mach B will be: PMT= 2,000, N= 7, I = 14, FV= 0, PV = −8,576.61 −8,576.61 − 15,000 = −23,576.61. Treating this as the present value of a 7-period annuity, setting i to 14 percent, and solving for payment will yield a payment of −$5,497.89, which is machine B's EAC.

You Are Evaluating Two Different Machines