Question

Machine X has an upfront cost of $402,000 and annual operating costs of $12,150 over its 4-year life. Machine Y costs $370,000 upfront and has annual operating costs of $5,980 over its 3-year life. Whichever machine is purchased will continue to be replaced at the end of its useful life. If the required return is 15.50% for both machine, what is the absolute value of the dollar difference between the EACs of the two machines?

Answer 1

Solution :-

Equivalent Annual Cost = [ - Initial Cost - Annual Exps * PVAF ( r , n ) ] * A/P ( r ,n )

Equivalent Annual Cost of Machine X =

= [ - $402,000 - $12,150 * PVAF( 15.50% , 4 ) ] * A/P ( 15.50% , 4 )

= [ - $402,000 - ( $12,150 * 2.8263 ) ] * 0.3538

= - $436,340.06 * 0.3538

= - $154,383.28

Equivalent Annual Cost of Machine Y =

= [ - $370,000 - $5,980 * PVAF( 15.50% , 3 ) ] * A/P ( 15.50% , 3 )

= [ - $370,000 - ( $5,980 * 2.2644 ) ] * 0.4416

= - $383,541.27 * 0.4416

= - $169,376.82

The absolute value of the dollar difference between the EACs of the two machines = $169,376.82 - $154,383.28

= $14,993.54

If there is any doubt please ask in comments

Thank you please rate