You are trying to pick the least-expensive machine for your company.You have two choices: machine A,which will cost $50,000 to purchase and which will have OCF of −$3,500 annually throughout the machine's expected life of three years; and machine B,which will cost $75,000 to purchase and which will have OCF of −$4,900 annually throughout that machine's four-year life.Both machines will be worthless at the end of their life.If you intend to replace whichever type of machine you choose with the same thing when its life runs out,again and again out into the foreseeable future,and if your business has a cost of capital of 14 percent,which one should you choose?

Question

Quizplus · Accepted Answer

One iteration of each machine will consist of the following cash flows:
 11ea8218_293a_644c_bbd8_a7e943ac7705_TB1326_00 The NPV of one machine A will be: PMT= 3,500, N= 3, I = 14, FV= 0, PV = −8,125.71 −8,125.71 − 50,000 = −58,125.71. Treating this as the present value of a 3-period annuity, setting i to 14 percent, and solving for payment will yield a payment of −$25,036.57, which is machine A's EAC. The NPV of one machine B will be: PMT = 4,900, N = 4, I = 14, FV = 0, PV = −14,277.19 −14,277.19 − 75,000 = −89,277.19. Treating this as the present value of a 4-period annuity, setting i to 14 percent, and solving for payment will yield a payment of −$30,640.36, which is machine B's EAC.

You Are Trying to Pick the Least-Expensive Machine for Your