Question

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs 145 initially, and then requires110 per year in maintenance costs. Machine B costs 215 initially, has a life of three years, and requires165 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 Equivalent Annual Cost (EAC).

Answer 1

To determine the Equivalent Annual Cost of two machines for comparison, we must take into account the initial purchase price, annual maintenance costs, discount rate, and lifespan of the machines. The EAC helps to find the more cost-effective option over time. Unfortunately, incomplete data in the question makes it impossible to calculate the exact EAC.

Step-by-step explanation:

To calculate the Equivalent Annual Cost (EAC) of two machines, we need to compare the costs of each machine over their respective lifespans, taking into account both the initial purchase price and the ongoing maintenance costs. We also factor in the discount rate to account for the time value of money since future expenses are worth less in today's terms.

For Machine A, the initial cost is $145, and it requires $110 per year in maintenance for its two-year lifespan. We can calculate the present value (PV) of these costs and then find the EAC for Machine A.

For Machine B, it has an initial cost of $215, requires $165 in annual maintenance, and has a lifespan of three years. We follow the same process to calculate the PV and EAC for Machine B.

The machine with the lower EAC is considered the more cost-effective choice. However, since the provided question does not include all the necessary data to perform these calculations, we're unable to compute the exact EAC for the machines described.