Answer:
Machine B should be purchased because it has a lower equivalent annual cost
Explanation:
To determine the better of the two options, we would compare the equivalent annual cost of each options using a discount rate of 14% per annum
Equivalent annual cost = Total PV of cost /Annuity factor
Total PV of cost = Initial cost + PV of annual operating cost
PV of annual operating cost= Annual operating cost × Annuity factor
Annuity factor = (1- (1+r)^(-n))/r
r- rate , n- years
Machine A
PV of annual operating cost = 8,000 × (1- 1.14^(-3)/0.14= 18573.05622
PV of total cost = 290,000 +18573.05622
= 308,573.06
Uniform Annual cost = 308,573.06 /2.321632027
= 132,912.13
Equivalent annual cost = $132,912.13
Machine B
PV of annual operating cost = 12,000 × (1- 1.14^(-2)/0.14= 19759.92613
PV of total cost = 180,000 + 19759.92613
= 199,759.93
Equivalent annual cost = 199,759.93 /1.6466=$121,312.15
Equivalent annual cost = $121,312.15
Machine B should be purchased because it has a lower equivalent annual cost
Total PV of cost
