Question

3. Precision Plumbus is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $905,000, annual operating costs of $27,000, and a 4-year life. Machine B costs $1,025,000, has annual operating costs of $20,000, and has a 5-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should be purchased?

Answer 1

E 511 512 A в 509 Year Machine A 510 -$905,000 -$27,000 -$27,000 513 -$27,000 514 -$27,000 515 516 Present value of costs 517 -PVIFA(15%,4) с PVIF@15% 1.000 0.870 0.756 0.658 0.572 / F G Year Machine B 0 $1,025,000 -$20,000 -$20,000 -$20,000 -$20,000 -$20,000 Present value -$905,000.00 -$23,478.26 -$20,415.88 -$17,752.94 -$15,437.34 PVIF@15% 1.000 0.870 0.756 0.658 0.572 0.497 Present value -$1,025,000.00 -$17,391.30 -$15,122.87 -$13,150.32 -$11,435.06 -$9,943.53 -$982,084.42 2.855 Present value of costs =PVIFA(15%,5) -$1,092,043.10 3.352 518 519 Equivalent annual cost (EAC) -$343,990.14 520 Equivalent annual cost (EAC) -$325,773.44 521 522 Machine A should be purchased.

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