Two machines,A and B,which perform the same functions,have the following costs and lives. $$\begin{array} { c r r }
\text { Type } & \text { PV Costs } & \text { Life } \
\text { Machine A } & \$ 6000 & 5 \
\text { Machine B } & \$ 8000 & 7
\end{array}$$
Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.
A)Machine A because the EAC is $1789.89
B)Machine B because the EAC is $1922.88
C)Machine A because it has lower PV costs
D)Machine B beca

Question

Two machines,A and B,which perform the same functions,have the following costs and lives. $$\begin{array} { c r r } 
\text { Type } & \text { PV Costs } & \text { Life } \
\text { Machine A } & \$ 6000 & 5 \
\text { Machine B } & \$ 8000 & 7
\end{array}$$
Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.
A)Machine A because the EAC is $1789.89
B)Machine B because the EAC is $1922.88
C)Machine A because it has lower PV costs
D)Machine B beca

Quizplus · Accepted Answer

We need to calculate the EAC (Equivalent Annual Cost) for both machines to determine which one has a lower cost per year.

For Machine A:
PV Costs = $6000
Life = 5 years
i = 15%

Using the formula: EAC = PV x (i(1+i)^n)/((1+i)^n-1)

EAC = $6000 x (0.15(1+0.15)^5)/((1+0.15)^5-1)
EAC = $1789.89

For Machine B:
PV Costs = $8000
Life = 7 years
i = 15%

EAC = $8000 x (0.15(1+0.15)^7)/((1+0.15)^7-1)
EAC = $1922.88

Since Machine A has a lower EAC, it is the better choice.

Two Machines,A and B,which Perform the Same Functions,have the Following