Question

The equivalent annual cost method is useful in determining: _________

a. the tax shield benefits of depreciation given the purchase of new assets for a project.
b. which one of two machines to acquire given equal machine lives but unequal machine costs.
c. the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended.
d. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

Answer 1

Equivalent annual cost method helps determine the most cost-effective machine to purchase from options with different lifespans by converting costs to an equivalent annual basis using present discounted values.

Step-by-step explanation:

The equivalent annual cost method is useful in determining which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out. This method assists in evaluating different capital investment options by converting the costs of each option into an equivalent annual amount that can be directly compared irrespective of their different lifespans. It incorporates the present discounted value of future benefits and costs, aiding in a comprehensive cost/benefit analysis which includes factors such as initial costs, maintenance, operating costs, and salvage values spread over the different lifespans of the assets.