Precision Tool is analyzing two machines to determine which one it should purcha

Question

Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost $892,000, annual operating costs of $26,300, and a 4 year life. Machine B costs $1,127,000, has annual operating costs of $19,500, and has a 5 year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Precision Tool purchase? Can you show how to calculate the cost of each machine please? Thank you very much.

Explanation / Answer

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks Net present cost (value) for machine A = $892K + $26300/1.15 + .. + $26300/1.15^4 = $967085.94 Net present cost (value) for machine B = $1127K + $19500/1.15 + .. + $19500/1.15^5 = $967085.94 = $1192367.02 Since machine B costs more, machine A should be bought.

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