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Answer:
$-1081.01
$-2536.89
Explanation:
Equivalent annual cost method is a capital budgeting method used to choose between two projects with an unequal life span
The decision rule is to choose the product with the higher Equivalent annual cost
Equivalent annual annuity method is better for making this decision because if net present value is used, the project with the higher useful life would be chosen. this does not mean it is more profitable
EAA =
Net present value is the present value of after-tax cash flows from an investment less the amount invested.
NPV can be calculated using a financial calculator
Machine A
Cash flow in year 0 = - $5,000
Cash flow in year 1 = $800
Cash flow in year 2 = $900
Cash flow in year 3 = $1,000
I = 9%
NPV A = -2736.35
Machine B
Cash flow in year 0 = -$6,000
Cash flow in year 1 = $850
Cash flow in year 2 = $900
I = 9%
NPV B = -4462.67
EAA =
(0.09 x -2736.35) / ( 1 - (1.09)^3) = $-1081.01
(0.09 x -4462.67) / ( 1 - (1.09)^2)= $-2536.89