Precision Tool is analyzing two machines to determine which one it should purcha

Question

Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost $892,000, annual operating costs of $26,300, and a 4 year life. Machine B costs $1,127,000, has annual operating costs of $19,500, and has a 5 year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Precision Tool purchase? Can you give the method too please?

Explanation / Answer

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks Net present cost (value) for machine A = $892K + $26300/1.15 + .. + $26300/1.15^4 = $967085.94 Net present cost (value) for machine B = $1127K + $19500/1.15 + .. + $19500/1.15^5 = $967085.94 = $1192367.02 Since machine B costs more, machine A should be bought.

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