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 of $892,000, annual operating costs of $28,200, and a 4-year life. Machine B costs $1,118,000, 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?

Explanation / Answer

Machine A cost

892000 + 4(28200) = 1,004,800 = 4 years

A's cost when used for 5 years = 1,004,800 x 1.25 = 1,256,000

Machine B cost

1,118,000 + 4(19500) = 1,200,000

5 years = 1,200,000

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