Question

The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $100,230 and has a four-year life. The second machine costs $155,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of their life. What method should be used to determine which machine to purchase?

Answer 1

Answer:

Equivalent annual cost method

Explanation:

Equivalent annual cost method is a 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 cost 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