Question

solve using a financial calculator and show work please.

5. Precision Tool is analyzing two machines to determine which one it should purchase. The company equires a percent rate of return and uses straight-line depreciation to a zero book value over the life on its equipment. Machine A has a cost of $892,000, annual operating costs of $28,200, and a 4-year me 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. Precision Tool should purchase Machine because it lowers the firm's annual cost by approximately as compared to the other machine. (a) A: $12,380 (b) B; $16,965 (c) A; $17,404 (d) B: $17,521

Answer 1

Solution:

First we need to calculate Annuity factor for both the machine. The formula is:

Annuity Factor = (1−1/(1+r)t) / r

​​where r=Cost of capital and t=Number of periods​

Based on above formula Annuity factors of machines are as below

Machine A= 2.854

Machine B= 3.3515

Equal Annual cost of machine A

=(892000/2.854 ) +28200 = 340743

Equal Annual cost of machine B

=(1118000/3.3515 ) +19500= 353081

Based on above machine A is having loser cost by $ 12338 and hence option A is correct

Option A is $ 12,380 which may be because of rounding off in above calculations