Question

Precision Dyes is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 15 percent and uses straight-line depreciation to a zero book value over the life of its equipment. Ignore bonus depreciation. Machine A has a cost of $462,000, annual aftertax cash outflows of $46,200, and a four-year life. Machine B costs $898,000, has annual aftertax cash outflows of $16,500, and has a seven-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should the company purchase and how much less is that machine's EAC as compared to the other machine's? B; $23,156.82 A; $17,404.04 A; $24,321.02 B; $17,521.94 B; $16,791.08

Answer 1

Answer:

$24,321.02

Explanation:

For computing the EAC first we have to determine the net present value for both machines which are shown below:            

For Machine A

Net present value = Annual cash outflows × PVIFA factor for 15% at four years - initial cost

= -$46,200 × 2.8550 - $462,000

= -$131,901 - $462,000

= -$593,901

Now the EAC is

= -$593,901 ÷ 2.8550

= -$208,021.37

For Machine B

Net present value = Annual cash outflows × PVIFA factor for 15% at seven years - initial cost

= -$16,500 × 4.1604  - $898,000

= -$68,646.60 - $898,000

= -$966,646.60

Now the EAC is

= $966,646.60 ÷ 4.1604

= -$232,344.63

The different amount in EAC is

= $24,323.26