Machine A has an immediate cost of $18,000, and it will earn a net income of $74

Question

Machine A has an immediate cost of $18,000, and it will earn a net income of $7400 per year for a total of 6 years. Machine B has an immediate cost of $22,000, and it will earn a net income of $4100 per year for a total of 24 years. Assume that Machine A can continually be replaced at the end of its useful life with an identical replacement. Neither machine has any salvage value. Enter the annual equivalent worth of the machine that is the best alternative if the interest rate is 8.5%. If neither machine is acceptable, enter 0

Explanation / Answer

Statement showing Annaul equivalent worth

Thus machine A should be accepted

Particulars Machine A Machine B Immediate cost 18000 22000 Capital recovery factor 1/PVIFA(8.5%,6years)
1/4.5536 0.2196 1/PVIFA(8.5%,24years)
1/10.1041 0.09897 Annual cost 3952.9 2177.3 Annual revenue 7400 4100 Annual equivalent worth 3447 1923

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