Question

You are trying to choose between purchasing one of two machines for a factory. Machine A costs $15,500 to purchase and has a three-year life. Machine B costs $17,400 to purchase but has a four-year life. Regardless of which machine you purchase, it will have to be replaced at the end of its operating life. Which machine should you choose? Assume a marginal tax rate of 35 percent and a discount rate of 15 percent. (Round answers to 2 decimal places, e.g. 15.25.)Equivalent Annual Cost (EAC) of machine A Equivalent Annual Cost (EAC) of machine B

Answer 1

Answer:

EAC of Machine A is $6,788.64

EAC of Machine B is $6,094.62

 We should purchase Machine B because of its ]lower EAC

Explanation:

Equivalent Annual Cost (EAC) = (Asset price x discount rate)/(1-(1+discount rate)^(-n))), in which n is the number of year for usage of asset.

EAC of Machine A is $6,788.64 = ($15,500x15%)/(1-(1+15%)^(-3))

EAC of Machine B is $6,094.62 = ($17,400x15%)/(1-(1+15%)^(-4))