Your firm is evaluating the merits of several different machines. Machine A has a useful life of 5-years, generates an NPV of $53,250, an IRR of 13.6% and an equivalent annual cost of $10,316. Machine B has a useful life of 3-years, an NPV of $61,051, an IRR of 12.5%, and an equivalent annual cost of $9,724. Machine C has a useful life of 4-years, generates an NPV of $55,225, an IRR of 15.2% and an equivalent annual cost of $7,535 Machine D has a useful life of 7-years, generates an NPV of $64,020, an IRR of 11.4% and an equivalent annual cost of $8,885. Which machine should be purchased and why?

Question

Quizplus · Accepted Answer

The best choice is machine A because it has the highest net present value ($53,250) and the most positive equivalent annual cost ($10,316). While machine C has a higher IRR, it has a lower NPV and a shorter useful life. Machine D has a higher NPV but also has a longer useful life and a higher equivalent annual cost. Machine B has a higher NPV than machine A but has a shorter useful life and a lower equivalent annual cost. Therefore, machine A is the most desirable option as it has the highest NPV and the most positive EAC.

Your Firm Is Evaluating the Merits of Several Different Machines