Question

One of two machines in the 3-year MACRS class with no direct revenue (cost only) must be selected long term need in a company with a MARR of 8.0%. Applying current tax law the taxes by year for each machine are shown as well as the yearly cost that stays constant each year. Prepare and report a valid worth measure of the ATCF/CFAT for both machines and clearly in your answer identify the preferred economic choice.

Machine	Life yrs	Purchase Cost	Yearly Cost	Year	1	2	3	4	5	6
A	4	44,500	19,000	Taxes	-8,820	-10,221	-6,486	-5,554
B	6	69,000	17,000	Taxes	-8,400	-10,011	-5,716	-4,644	-3,750	-3,750

Answer 1

First we have to calculate the after tax cash flows and NPV of both machines, which is shown below:

Machine A Year o Annual cost Less: Tax savings After tax Cash Flows Year 1 (19,000.00) (8,820.00) (10,180.00) Year 2 (19,000.00) (10,221.00) (8,779.00) Year 3 (19,000.00) (6,486.00) (12,514.00) Year 4 (19,000.00) (5,554.00) (13,446.00) Initial Cost Total Cash Flows Present value factor @ 8% Present Value Net present Value (NPV) (44,500.00) (44,500.00) 1 (44,500.00) (81,269.73) (10,180.00) 0.9259259261 (9,425.93) (8,779.00) 0.85733882 (7,526.58) (12,514.00) 0.793832241 (9,934.02) (13,446.00) 0.735029853 (9,883.21) Machine B Year o Annual cost Less: Tax savings After tax Cash Flows Year 1 (17,000.00) (8,400.00) (8,600.00) Year 2 (17,000.00) (10,011.00) (6,989.00) Year 3 (17,000.00 (5,716.00) (11,284.00) Year 4 (17,000.00) (4,644.00) (12,356.00) Year 5 (17,000.00) 3,750.00 (20,750.00) Year 6 (17,000.00) (3,750.00) (13,250.00) Initial Cost Total Cash Flows Present value factor @ 8% Present Value Net present Value (NPV) (69,000.00) (69,000.00) 1 (69,000.00) (123,466.38) (8,600.00) 0.925925926 (7,962.96) (6,989.00) 0.85733882 (5,991.94) (11,284.00) 0.793832241 (8,957.60) (12,356.00) 0.735029853 (9,082.03) (20,750.00) 0.680583197 (14,122.10) (13,250.00) 0.630169627 (8,349.75)

Equivalent annual cost (EAC) of Mahcine A = NPV / Present value annuity factor 8% 4 years
= $81269.73 / 3.31213
= $24,537.02

Equivalent annual cost (EAC) of Mahcine B = NPV / Present value annuity factor 8% 6 years
= $123,466.38 / 4.62288
= $26,707.68

As the EAC of Machine A is lower, it should be preferred.