Question

Suppose your bottling plant is in need of a new bottle capper. You are
considering two different capping machines that will perform equally well,
but have different expected lives. The more expensive one costs Tshs
30,000 to buy, requires the payment of Tshs 3,000 per year for
maintenance and operation expenses, and will last for 5 years. The
cheaper model costs only Tshs 22,000, requires operating and
maintenance costs of Tshs 4,000 per year, and lasts for only 3 years.
Regardless of which machine you select, you intend to replace it at the
end of its life with an identical machine with identical costs and operating
performance characteristics. Because there is not a market for used
cappers, there will be no salvage value associated with either machine.
Assume that the discount rate on both of these machines is 8 percent.

Answer 1

Evaluation of proposal for selection of machine

			MACHINE 1		MCAHINE 2
YEAR	PARTICULARS	DISC. RATE @8% (a)	CASH OUTFLOW (b)	DISC. CASH OUTFLOW (c=a*b)	CASH OUTFLOW (d)	DISC. CASH OUTFLOW (e=a*d)
1	Purchase of Machinary	1.00	30,000	30,000	22,000	22,000
1-5	Operation & maintenance cost of machinary 1	3.993	3,000	11,979
1-3	Operation & maintenance cost of machinary 2	2.577			4,000	10,308
	TOTAL			41,979		32,308

Equivalent annualiesd cost (EAC)= Total cost / Prenest value annuity factor

For Machine 1 = 41,979/3.993 = 10,513

for Machine 2 = 32,308/ 2.577 = 12,537

Decision- We will recommend for Machinary 1 i.e Tshs 30000 because its cash outflow is lower .