"You plan to operate the same type of machine for 10 years. Machine A lasts 5 years and Machine B lasts 10 years. Machine A costs $7,000 and Machine B costs $9,000. The salvage value of Machine A is $3,000 and the salvage value of Machine B is $1,600. Annual operation and maintenance costs are $2,000 for Machine A and $2,400 for Machine B. Both machines can be purchased in the future at the same price as today, and their salvage values and annual costs will remain as they are now. Your MARR is 8%. Enter the Annual Equivalent Cost (AEC) as a POSITIVE number for the machine that should be selected."
Annual equivalent costs converts the present value of costs of unequal lived mutually exclusive projects into an equivalent annual amount/cost.
Computation of equivalent annual cost for machine A & machine B -
Recommendation Since machine A has a lower equivalent annual cost, it is preferred investment.
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