Two machines, A and B, which perform the same functions, have the following costs and lives. Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.
A) Machine A as the EAC is $1789.89
B) Machine B as the EAC is $1922.88
C) Don't buy either machine
D) Accept both A and B

Question

Two machines, A and B, which perform the same functions, have the following costs and lives.  Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.
A) Machine A as the EAC is $1789.89 
B) Machine B as the EAC is $1922.88 
C) Don't buy either machine 
D) Accept both A and B

Quizplus · Accepted Answer

The best choice is machine A as it has a lower EAC compared to machine B. The cost of capital is 15%, which means that the present value of future cash flows from the machines will be discounted at 15%. Machine A has a lower initial cost and longer life, resulting in a lower EAC compared to machine B. Therefore, selecting machine A would result in lower costs over the entire life of the machine.

Two Machines, a and B, Which Perform the Same Functions