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 $100 initially, and then $55 per year in maintenance costs. Machine B costs $150 initially, has a life of three years, and requires $25 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. What is the EAC of the better machine for the firm? The discount rate is 10% and the tax rate is zero. -$85.32 -$195.45 -$112.62 -$75.62 -$85.32 -$195.45 -$112.62 -$75.62 -$85.32 -$195.45 -$112.62 -$75.62

Explanation / Answer

To calculate an EAC, use the formula (Price * i) / (1 - (1 + i) ^ -n) + M

Machine A's EAC: ($100 * 0.1) / (1 - (1 + 0.1) ^ -2) + $55 = $112.62

Machine B's EAC: ($150 * 0.1) / (1 - (1 + 0.1) ^ -3) + $25 = $85.32

Machine B has a lower EAC, so the answer is -$85.32.

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