The Equivalent annual cost for the Machine A and B is $5,083,947.72 and $5,461,499.68 respectively,
<h3>What is an Equivalent annual cost?</h3>
In accounting, this refers to the annual cost of owning, operating, and maintaining an asset over its entire life.
<h3>Machine A:</h3>
Cost of Machine = $3,210,000
Useful Life = 6 years
Annual Depreciation = Cost of Machine / Useful Life
Annual Depreciation = $3,210,000 / 6
Annual Depreciation = $535,000
Annual OCF = [Sales - Variable Costs - Fixed Costs] * (1 - tax)+ tax * Depreciation
Annual OCF = [$12,400,000 - 37% * $12,400,000 - $350,000] * (1 -0.24) + 0.24 * $535,000
Annual OCF = $7,462,000 * 0.76 + 0.24 * $535,000
Annual OCF = $5,799,520
NPV = -$3,210,000 + $5,799,520 * PVIFA(9%, 6)
NPV = -$3,210,000 + $5,799,520 * 4.48592
NPV = $22,806,182.76
EAC = NPV / PVIFA(9%, 6)
EAC = $22,806,182.76 / 4.48592
EAC = $5,083,947.72
<h3>Machine B:</h3>
Cost of Machine = $5,455,000
Useful Life = 9 years
Annual Depreciation = Cost of Machine / Useful Life
Annual Depreciation = $5,455,000 / 9
Annual Depreciation = $606,111.11
Annual OCF = [Sales - Variable Costs - Fixed Costs] * (1 - tax)+ tax * Depreciation
Annual OCF = [$12,400,000 - 32% * $12,400,000 - $240,000] * (1 -0.24) + 0.24 * $606,111.11
Annual OCF = $8,192,000 * 0.76 + 0.24 * $606,111.11
Annual OCF = $6,371,386.67
NPV = -$5,455,000 + $6,371,386.67 * PVIFA(9%, 9)
NPV = -$5,455,000 + $6,371,386.67 * 5.99525
NPV = $32,743,055.93
EAC = NPV / PVIFA(9%, 9)
EAC = $32,743,055.93 / 5.99525
EAC = $5,461,499.68
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