You are considering the purchase of one of two machines used in your manufacturi

Question

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $175 initially, and then $80 per year in maintenance costs. Machine B costs $245 initially, has a life of three years, and requires $195 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine.

The discount rate is 11 percent and the tax rate is zero. Calculate the EAC.?

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $175 initially, and then $80 per year in maintenance costs. Machine B costs $245 initially, has a life of three years, and requires $195 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine.

Explanation / Answer

Machine A is better

Let us calculate the cost incurred in the case of both the machines for the first three years

For machine A life is 2 years , then we have to buy a new one again costing $175

Now cost incurred for three years if we buy machine A = 175 + 80/1.11 + 80/1.11^2 + 175/1.11^3 =$439.96

Life of machine B is 3 years

So the cost incrred for 3 years if we take machine B is

245+195/1.11+195/1.11^2+195/1.11^3 =$721.52

Clearly machine A costs less so it is better

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