Question

Specialty Clothing Corporation is considering the purchase of two machines for their ongoing operations. When a machine is worn out, it will be replaced with another machine, since it is integral to the operations of the business. The discount rate is 9%. The CFO has collected the following information on two possible choices:

Machine A           Machine B

Initial cost                      220,000               190,000

Useful Life                     17 years               20 years

Annual maintenance      1,900                   3,000

Calculate the equivalent annual cost of each machine.

EAC A _______________     EAC B _________________

Which machine should Specialty Clothing Corporation choose? ____________

Answer 1

Year Machine A 0 $ 220,000 1 $ 1,900 2 $ 1,900 3 $ 1,900 4 $ 1,900 5 $ 1,900 6 $ 1,900 7 $ 1,900 8 $ 1,900 9 $ 1,900 10 $ 1,900 11 $ 1,900 12 $ 1,900 13 $ 1,900 14 $ 1,900 15 $ 1,900 16 $ 1,900 17 $ 1,900 18 $ 1,900 19 $ 1,900 PVIF@9% 1.000 $ 0.917 $ 0.842 $ 0.772 $ 0.708 $ 0.650 $ 0.596 $ 0.547 $ 0.502 $ 0.460 $ 0.422 $ 0.388 $ 0.356 $ 0.326 $ 0.299 $ 0.275 $ 0.252 $ 0.231 $ 0.212 $ 0.194 $ Present value 220,000 1,743 1,599 1,467 1,346 1,235 1,133 1,039 954 875 803 736 676 620 569 522 479 439 403 370 9 $ Year Machine B 0 $ 190,000 1 $ 3,000 2 $ 3,000 3 $ 3,000 4 $ 3,000 5 $ 3,000 6 $ 3,000 7 $ 3,000 8 $ 3,000 3,000 10 $ 3,000 3,000 12 $ 3,000 13 $ 3,000 14 $ 3,000 15 $ 3,000 16 $ 3,000 17 $ 3,000 18 $ 3,000 19 $ 3,000 20 $ 3,000 85 60 65 EHF 260.000 lume PVIF@9% Present value 1.000 $ 190,000 0.917 $ 2,752 0.842 $ 2,525 0.772 $ 2,317 0.708 $ 2,125 0.650 $ 1,950 0.596 $ 1,789 0.547 $ 1,641 0.502 $ 1,506 0.460 $ 1,381 0.422 $ 1,267 0.388 $ 1,163 0.356 $ 1,067 0.326 $ 979 0.299 $ 898 0.275 $ 824 0.252 $ 756 0.231 $ 693 0.212 $ 636 0.194 $ 583 0.178 $ 535 $ Present value of costs EPVIFA(11%,19) 237,005 8.950 $ Present value of costs :PVIFA(11%,20) 217,386 9.129 Equivalent annual cost (EAC) $ 26,481 Equivalent annual cost (EAC) $ 23,814 | Machine B should be choosen. It has least EAC.

*Please rate thumbs up