Question

Pactiv Corp is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 14 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $415,000, annual operating costs of $28,300, and a 4-year life. Machine B costs $300,000, has annual operating costs of $45,100, and a 3-year life. The firm currently pays no taxes. Which machine should be purchased and why?

		Machine A; because it will save the company about $3,589 a year
		Machine A; because it will save the company about $5,217 a year
		Machine B; because it will save the company about $4,120 a year
		Machine B; because it will save the company about $6,343 a year
		Machine B; because it will save the company about $2,760 a year

Answer 1

234| Year | Machine B 235 236 237 238 239 240 Present value of costs 241 PWFA 1496,3 242 | PVİF@14% Present value Year Machine A PWF@14% Present value 0 $300,000 1 $ 45,100 2$ 45,100 3 $ 45,100 1.000 0.877 0.769 0.675 300,000 $39,561 $34,703 $30,441 0 $415,000 28,300 28,300 28,300 28,300 1.000 0.877 0.769 0.675 0.592 $415,000.00 $24,824.56 $21,775.93 $19,101.69 $16,755.87 4 $404,706 2.322 Present value of costs $497,458.06 2.914 PVIFA 1496,4 243 Equivalent annual cost (EAC)$174,319 Equivalent annual cost (EAC)$170,730 244 245 246 Hence, correct option is "Machine A; because it will save the company about $3,589 a year"