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You are considering the purchase of one of two machines used in your manufacturing plant. Machine...

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in maintenance costs. Machine B costs $25,000 initially, has a life of three years, and requires $3,500 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 14 percent and the tax rate is zero.

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Answer #1

Machine B is better option because its equivalent annual cost (EAC) is lower.

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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