The Alabaster Coffee Company is considering the purchase of a new bean roaster a
ID: 2705239 • Letter: T
Question
The Alabaster Coffee Company is considering the purchase of a new bean roaster and grinder. The revenues are expected to be the same no matter which machine is acquired. The Quick-Roast machine has a cost of $75,000 and is expected to last 4 years with operating costs of $12,000 per year. The Mellow-Roast Co. machine has a cost of $50,000 and operating costs of $4,500 per year but will last for only 2 years. The discount rate is 8%. Ignore taxes and compute the equivalent annual cost (EAC) of each machine to the nearest dollar. Which one should be chosen, and why?
Quick-Roast Analysis:
Mello Roast Analysis:
The machine that should be chosen is the __________ and the reason is that ___________.
SHOW all woek
Explanation / Answer
Quick-roast macine,
NPV = 75000+(12000/1.08)+(12000/1.08^2)+(12000/1.08^3)+(12000/1.08^4) = $114745.52
EAC = 114745.52/A
A = (1-(1/1.08^4))/.08 = 3.3121
EAC = 114745.52/3.3121 = 34644.34
Mello roast analysis
NPV = 50000+(4500/1.08)+(4500/1.08^2) = 58024.691
EAC = NPV/A
A = (1-(1/1.08^2))/.08 = 1.7832
EAC = 58024.691/1.7832 = $32539.64
Machine Mello Roast should be chosen because its EAC is less.
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