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You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $70,000, has a 5-year life,...

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $70,000, has a 5-year life, and has an annual OCF (after-tax) of –$11,300 per year. The Keebler CookieMunster costs $96,500, has a 7-year life, and has an annual OCF (after-tax) of –$9,300 per year.

If your discount rate is 11 percent, what is each machine’s EAC?

EAC

Pillsbury 707 ?

Keebler Cookie Munster?

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Answer #1

Pillsbury 707:

Initial Investment = $70,000
Annual OCF = -$11,300
Useful Life = 5 years

NPV = -$70,000 - $11,300 * PVIFA(11%, 5)
NPV = -$70,000 - $11,300 * 3.69590
NPV = -$111,763.67

EAC = NPV / PVIFA(11%, 5)
EAC = -$111,763.67 / 3.69590
EAC = -$30,239.91

Keebler Cookie Munster:

Initial Investment = $96,500
Annual OCF = -$9,300
Useful Life = 7 years

NPV = -$96,500 - $9,300 * PVIFA(11%, 7)
NPV = -$96,500 - $9,300 * 4.71220
NPV = -$140,323.46

EAC = NPV / PVIFA(11%, 7)
EAC = -$140,323.46 / 4.71220
EAC = -$29,778.76

Based on EAC, you should use Keebler Cookie Munster as its EAC is lower.

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