Brooks, Inc. is analyzing two machines to determine which one it should purchase

Question

Brooks, Inc. is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $485,000, annual operating costs of $28,500, and a 3-year life. Machine B costs $300,000, has annual operating costs of $45,400, and a 2-year life. The firm currently pays no taxes. Which machine should be purchased and why? Machine A; because it will save the company about $8,500 a year Machine A; because it will save the company about $7,318 a year Machine B; because it will save the company about $7,520 a year Machine B; because it will save the company about $8,216 a year Machine B; because it will save the company about $9,412 a year

Explanation / Answer

EAC of Machine A=28500+485000/(1/1.12+1/1.12^2+1/1.12^3)=230429.2556

EAC of Machine B=45400+300000/(1/1.12+1/1.12^2)=222909.434

Savings from Machine B=230429.2556-222909.434=7519.8216

Hence, Machine B should be purchased because it will save the company about $7,520 a year

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