Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?
A) Internal rate of return
B) Net present value
C) Equivalent annual cost
D) Depreciation tax shield
E) Bottom-up operating cash flow

Question

Quizplus · Accepted Answer

Equivalent annual cost takes into account all relevant factors such as purchase price, operating costs, salvage value and useful life, and presents a single annual cost figure which can be used to compare the machines. It also accounts for the time value of money and is therefore a useful tool for decision making.

Dan Is Comparing Three Machines to Determine Which One to Purchase