You are considering the purchase of one of two machines required in your product
ID: 2383035 • Letter: Y
Question
You are considering the purchase of one of two machines required in your production process. Machine A has a life of two years. Machine A costs $50 initially and then $70 per year in maintenance. Machine B has an initial cost of $90. It requires $40 in maintenance for each year of its three-year life. Either machine must be replaced at the end of its life. Which is the better machine for the firm? The discount rate is 15% and the tax rate is zero.
Machine A as EAC for machine A is $100.76
Machine B as EAC for machine B is $79.42
Machine A as PV of costs for machine A is $163.80
Machine B as PV of costs for machine B is $181.33
Machine A as EAC for machine A is $100.76
Machine B as EAC for machine B is $79.42
Machine A as PV of costs for machine A is $163.80
Machine B as PV of costs for machine B is $181.33
Explanation / Answer
PV for Machine A = $50 + $70/(1 + 15%) + $70/(1 + 15%)2
= $163.80
PV for Machine B = $90 + $40/(1 + 15%) + $40/(1 + 15%)2 + $40/(1 + 15%)3
= $181.33
EAC for Machine A = PV of Machine A / Annuity factor for 2 years
= $163.80 / [1 - (1 + 15%)-2]/15%
= $100.76
EAC for Machine B = PV of Machine B / Annuity factor for 3 years
= $181.33 / [1 - (1 + 15%)-3]/15%
= $79.42
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