Question

# J&J Automotive is analyzing two machines to determine which one they should purchase. The company requires...

J&J Automotive is analyzing two machines to determine which one they should purchase. The company requires a 16% rate of return and the machinery belongs in a 30% CCA class. Machine A has a cost of \$427,000, annual operating costs of \$13,000, and a 4-year life. Machine B costs \$390,000, has annual operating costs of \$6,500, and has a 3-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should J&J purchase and why? Ignore taxes.

Multiple Choice

• B; because its EAC is \$181,602.43

• B; because its EAC is \$11,209.18 less than that of Machine A

• B; because its EAC is \$12,408.23 less than that of Machine A

• A; because its EAC is \$14,551.41 less than that of Machine B

• A; because its EAC is \$162,408.19

Machine A:

NPV = Initial cost + PV of all operating costs

NPV=\$427000+(\$13000 * [email protected]%, 4 years)

[email protected]%, 4 years = (1/r)*(1-(1/(1+r)^n))

=\$427000+\$13000 * (1/r)*(1-(1/(1+r)^n))

=\$427000+\$13000 * (1/0.16)*(1-(1/(1+0.16)^4))

=\$427000+\$13000 * 2.79818064

NPV=\$463,376.35

EAC =NPV / PVIFA @16%, 4 years

=\$463376.35 / 2.79818064

EAC = \$165,599.15

Machine B:

NPV = Initial cost + PV of all operating costs

NPV=\$390000+(\$6500 * [email protected]%, 3 years)

[email protected]%, 3 years = (1/r)*(1-(1/(1+r)^n))

=\$390000+\$6500 * (1/r)*(1-(1/(1+r)^n))

=\$390000+\$6500 * (1/0.16)*(1-(1/(1+0.16)^3))

=\$390000+\$6500 * 2.24588954

NPV= \$404,598.28

EAC =NPV / PVIFA @16%, 3 years

=\$404598.28 / 2.24588954

EAC=\$180,150.57

Answer will be A, as its EAC is \$14,551.41 less than that of Machine B (\$180150.57 - \$165599.15)

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