You are trying to choose between purchasing one of two machines for a factory. Machine A costs $15,500 to purchase and has a three-year life. Machine B costs $17,400 to purchase but has a four-year life. Regardless of which machine you purchase, it will have to be replaced at the end of its operating life. Which machine should you choose? Assume a marginal tax rate of 35 percent and a discount rate of 15 percent. (Round answers to 2 decimal places, e. g. 15.25.) Equivalent Annual Cost (EAC) of machine A Equivalent Annual Cost (EAC) of machine B

Question

Kade Crane

Business

8 May, 05:17

You are trying to choose between purchasing one of two machines for a factory. Machine A costs $15,500 to purchase and has a three-year life. Machine B costs $17,400 to purchase but has a four-year life. Regardless of which machine you purchase, it will have to be replaced at the end of its operating life. Which machine should you choose? Assume a marginal tax rate of 35 percent and a discount rate of 15 percent. (Round answers to 2 decimal places, e. g. 15.25.) Equivalent Annual Cost (EAC) of machine A Equivalent Annual Cost (EAC) of machine B

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Mike Hartman · Answer 1

EAC of Machine A is $6,788.64

EAC of Machine B is $6,094.62

We should purchase Machine B because of its ]lower EAC

Explanation:

Equivalent Annual Cost (EAC) = (Asset price x discount rate) / (1 - (1+discount rate) ^ (-n))), in which n is the number of year for usage of asset.

EAC of Machine A is $6,788.64 = ($15,500x15%) / (1 - (1+15%) ^ (-3))

EAC of Machine B is $6,094.62 = ($17,400x15%) / (1 - (1+15%) ^ (-4))