Mighty Cleaners, INC. must choose between two types of washing machines. Both Machines meet the companies...
Mighty Cleaners, INC. must choose between two types of washing machines. Both Machines meet the companies requirements. Machine A costs $35,000 and is expected to last 3 years with operating costs of $3800 per year. Machine B costs $25000 and is expected to last 2 years with operating costs of $4000 per year. Assume a discount rate of 10%. Which machine should they purchase? What is the equivalent annual cost of this machine?
Homework Answers
| Statement showing Cash flows | Machine A | Machine B | ||||
| Particulars | Time | PVF 10% | Amount | PV | Amount | PV |
| Cash Outflows | - | 1.0000 | (35,000.00) | (35,000.00) | (25,000.00) | (25,000.00) |
| Cash Outflows | 1.00 | 0.9091 | (3,800.00) | (3,454.55) | (4,000.00) | (3,636.36) |
| Cash Outflows | 2.00 | 0.8264 | (3,800.00) | (3,140.50) | (4,000.00) | (3,305.79) |
| Cash Outflows | 3.00 | 0.7513 | (3,800.00) | (2,855.00) | ||
| Present value of Cash Outflows | (44,450.04) | (31,942.15) | ||||
| PVF for 3 Years | 2.4869 | 1.7355 | ||||
| EAC | (17,874.02) | (18,404.76) | ||||
| They should purchase machine A since EAC is lower | ||||||
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Mighty Cleaners, INC. must choose between two types of washing
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