You need to choose between two machines based on the following information: Mach

Question

You need to choose between two machines based on the following information:

Machine 1 has a 3 year life, costs $350,000 with pre-tax operating costs of $75,000 per year.

Machine 2 has a 5 year life, costs $500.000 with pre-tax operating costs of $37,500 per year.

Both machines have a salvage value of $25,000 and are classed with a CCA rate of 20% per year. The company tax rate is 32% and the discount rate is 12%.

What is the EAC?

Which machine would you select as an investment?

Please show all calculations used to derive you answers let the working be more clear

Explanation / Answer

Machine 1

-350000

Net present value = $5,12,342

Equated Annual cost (EAC) = 5,12,342/(A3,12) = 5,12,342/2.10183= $2,13,313 per year

Machine 2

Net present value = -$ 6,20,993

Equated Annual cost (EAC) = 6,20,993/(A5,12) = 6,20,993/3.60447= $1,72,269

Decission :

Machine 2 annual cost is less than machine 1, therefore machine 2 will be selected

Particulars 0 1 2 3 Initial cost

-350000

0 0 0 Annual Maintenance cost 0 -75000 -75000 -75000 Residual value 25000 Net Cash flows -350000 -75000 -75000 -50000 12% Discount factor 1 0.8929 0.7972 0.7118 Net present value -350000 -66964 -59790 -35589

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.