*Problem 11.21 You are trying to choose between purchasing one of two machines f

Question

*Problem 11.21 You are trying to choose between purchasing one of two machines for a factory. Machine A costs $15,600 to purchase and has a three-year life. Machine B costs $17,200 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 14 percent. Equivalent Annual Cost (EAC) of machine A Equivalent Annual Cost (EAC) of machine B

Explanation / Answer

Answer:

Equivalent Annual cost of machine A =$15600/2.3216=$6719.50

Equivalent Annual cost of Machine B: $17200/2.9137=$5903.14

Choose: Machine B because it has lower EAC.

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