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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