You are considering the purchase of one of two machines used in your manufacturi
ID: 2750200 • Letter: Y
Question
You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $1500 initially, and then $400 per year in maintenance costs. Machine B costs $2000 initially, has a life of three years, and requires $300 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 6% and the tax rate is zero.
Year
0
1
2
3
Machine A's Cash Flows
Machine B's Cash Flows
Machine A's EAC
Machine B's EAC
Year
0
1
2
3
Machine A's Cash Flows
Machine B's Cash Flows
Explanation / Answer
Machine A Year Discount Cash Flows 0 1500 1 1500 1 400 0.943396 377.3585 2 400 0.889996 355.9986 Total Cash Flow 2233.357 EAC = 2233.4/1.83 1220.414 Machine B Year Cash Flows 0 2000 1 2000 1 300 0.943396 283.0189 2 300 0.889996 266.9989 3 300 0.839619 251.8858 Total 2801.904 EAC = 2801.9/2.67 1049.402
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