Your company needs a machine for the next 20 years. You are considering two diff

Question

Your company needs a machine for the next 20 years. You are considering two different machines. Machine A Installation cost ($): 1,900,000 Annual O&M costs ($): 93,000 Service life (years): 20 Salvage value ($): 79,000 Annual income taxes ($): 59,000 Machine B Installation cost ($): 0,950,000 Annual O&M costs ($): 97,000 Service life (years): 10 Salvage value ($): 46,000 Annual income taxes ($): 43,000 If your company s MARR is 17%, determine which machine you should buy. Assume that machine B will be available in the future at the same costs. Enter the Annual Equivalent Cost as a positive number of the preferred machine.

Explanation / Answer

Machine A

Machine B

Machine B should be selected

Particulars Amount Initial investment 1900000 PV of salvage value
=79000*PVIF(17%,20 years)
=79000*0.04328 -3419.12 Outflow 1896581 Capital recovery factor
1/PVIFA(17%,20year)
1/5.6277 0.177692 Annual cost 337008 Annual O&M costs 93000 Annual income taxes 59000 Annual Equivalent Cost 489008

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