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Managers of Swifty Embroidery have decided to purchase a new monogram machine and are considering two...

Managers of Swifty Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $104,000 and is expected to last five years. The second machine costs $166,000 and is expected to last eight years. Assume that the opportunity cost of capital is 8 percent. What is the equivalent annual cost for each system? (Do not round intermediate calculations. Round final answers to 2 decimal places, e.g. 2.75.)

Equivalent Annual Cost
First machine $

Second machine $


Which machine should Swifty Embroidery purchase?

Swifty Embroidery should purchase the

first or second

machine.
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Answer #1

(1)

Equivalent Annual Cost of first machine = initial investment/PVAF

= $104000/3.99271

= $26047.47

where,

PVAF(8%, 5) = 3.99271

(2)

Equivalent Annual Cost of second machine = initial investment/PVAF

= $166000/5.74664

= $28886.44

where,

PVAF(8%, 8) = 5.74664

(3)

Swifty Embroidery should purchase first machine as the equivalent annual cost is lower than that of second machine.

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