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You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $85 initially, and then $130 per year in maintenance costs. Machine B costs $155 initially, has a life of three years, and requires $105 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine.



The discount rate is 11 percent and the tax rate is zero. Calculate the EAC. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

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Answer:

EAC of machine A: $-179.63

EAC of machine B: $-168.42

Explanation:

Firstly, we need to calculate total net present value (NPV) of all cashflows for each of the machines. Then, we will use these amounts to solve for the equvalent annual cost (EAC) for each machine.

NPV of machine A = -85 - 130/(1 + 11%) - 130/(1 + 11%)^2 = -307.63

NPV of machine B = -155 - 105/(1 + 11%) - 105/(1 + 11%)^2 - 105/(1 + 11%)^3 =  -411.59

Now, we will solve for the EAC of each machine:

Machine A: -307.63 = EAC_A/(1 + 11%) + EAC_A/(1 + 11%)^2. Solve the equation, we get EAC_A = -179.63.

Machine B: -411.59 = EAC_B/(1 + 11%) +. .. + EAC_B/(1 + 11%)^3. Solve the equation, we get EAC_B = -168.42.

So, we should choose machine B

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