DO NOT ANSWER IF PREVIOUS ANSWERS GIVEN TO THIS POST ARE WRONG. You are consider

Question

DO NOT ANSWER IF PREVIOUS ANSWERS GIVEN TO THIS POST ARE WRONG. You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $180 initially, and then $75 per year in maintenance costs. Machine B costs $250 initially, has a life of three years, and requires $200 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. The discount rate is 13 percent and the tax rate is zero. Calculate the EAC.

Explanation / Answer

The first step is to get the Present Value of both assets assuming the discount rate is 13%.

PV Machine A = $180 +(75/1.13)+(75/1.13^2) =180 + 66.37+ 33.19 = 279.56

PV Machine B = $250 +(200/1.13)+(200/1.13^2) + (200/1.13^3) =250 +176.99+ 156.63 + 138.60= $722.22

So one should go for Machine B

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