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A company must decide whether to buy Machine A or Machine B.

                                                                 A                     B              

                        First cost                     $9,000             $17,000

                        Annual maintenance   $1,000                  $450

                        Salvage value              $4,000             $9,000

                         Useful life, in years          4                      10             

At a 9% annual interest rate, which Machine should be purchased? Use an annual cash flow analysis to find your answer.

A) What is the equivalent uniform annual cost (EUAC) of Machine A?

B) What is the equivalent uniform annual cost (EUAC) of Machine B?

C) Which machine should one choose?

Please show work including formula!

Thanks!

Explanation / Answer

A)

Equivalent uniform annual cost (EUAC) of Machine A

= 1000 + 9000 (0.09(1.094)/ (1.094-1)) - 4000 (0.09/ (1.094-1))

=1000 + 2778.018 – 874.67

=2903.34

B)

Equivalent uniform annual cost (EUAC) of Machine B

= 450 + 17000 (0.09(1.0910)/ (1.0910-1)) - 9000 (0.09/ (1.0910-1))

=450 + 2648.94 – 592.38

=2506.56

C) As Machine B has less Equivalent uniform Annual cost compared to Machine A, one should choose Machine B.

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