RENTAL RETRN 02 Su- McGraw+Education Campus Assignment Week S com/hm. tpx 1 B 1

Question

RENTAL RETRN 02 Su- McGraw+Education Campus Assignment Week S com/hm. tpx 1 B 1 u.1H- S»-. Alignment Number Conditional Format as Cell Cells Editing Formatting Table Styles d r Font Styles You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $95 initially, and then $140 per year in maintenance costs. Machine B costs $165 initially, has a life of three years, and requires $115 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine The discount rate is 12 percent and the tax rate is zero. Calculate the EAC. (Negative amounts should be indicated by a minus sign Round your answers to 2 decimal places.) Which one should you choose? Machine A life (Years) Machine A initial cost Machine A maintenance cost Machine B life (Years) Machine B initial cost Machine B maintenance cost Discount rate Tax rate 95.00 140.00 165.00 115.00 1 2.00% 0.00% fice 4 1.2 Assignment week 5

Explanation / Answer

Decision: Since the  Equivalent Annual Cost is low for Machine B, it should be selected.

Machine A Machine B a Purchase Cost ($)                            95                   165 b Life of machines (years)                              2                        3 c Running cost per year ($)                         140                   115 d PVAF (based on life and 12% discount factor)                      1.690                2.402 e Present Value of Running cost of machine (c*d)                         237                   276 f Cash outflow of machines (a+e)                         332                   441 g Equivalent Annual Cost (f/d)                         196                   184

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