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

One iteration of each machine will consist of the following cash flows:
 11ea8218_293c_11ff_bbd8_15919187c457_TB1326_00 The NPV of one machine A will be: PMT = 6,000, N = 5, I = 10, FV = 0, PV = −22,744.72 −22,744.72 − 25,000 = −47,744.72. Treating this as the present value of a 5-period annuity, setting i to 10 percent, and solving for payment will yield a payment of −$12,594.94, which is machine A's EAC. The NPV of machine B will be: PMT = 5,500, N = 7, I = 10, FV = 0, PV = −26,776.30 −26,776.30 − 30,000 = −56,776.30. Treating this as the present value of a 7-period annuity, setting i to 10 percent, and solving for payment will yield a payment of −$11,662.16, which is machine B's EAC.

You Are Evaluating Two Different Machines