Question

Your company is considering buying one of the two machines into product line. These two machines have different initial costs, annual operating costs, and different length of lives as following.

Machine A: Initial costs of $20,000; annual costs of $2,000 for 5 years

Machine B: Initial costs of $30,000; annual costs of $1,000 for 8 years

The cost of capital is 10%. What are their equivalent annual costs (EACs)? If you want to have lower average annual cost, which machine should you choose?

Answer #1

"Your company needs a machine for the next 20 years. You are
considering two different machines.
Machine A
Installation cost ($): 2,500,000
Annual O&M costs ($): 77,000
Service life (years): 20
Salvage value ($): 79,000
Annual income taxes ($): 65,000
Machine B
Installation cost ($): 1,250,000
Annual O&M costs ($): 107,000
Service life (years): 10
Salvage value ($): 46,000
Annual income taxes ($): 45,000
If your company s MARR is 14%, determine which machine you should
buy. Assume that machine...

M Digem Mines must choose between two alternative machines A and
B which perform the same function, but which have lives of 2 and 4
years, respectively. The initial cost of machine A is $30,000 and
its annual operating costs are expected to be $6,000. The initial
cost of machine B is $42,000 and its annual operating costs are
expected to be $9,000. Assume that the projects are repeatable and
there are no constraints on the availability of funds. Digem...

"A company is considering two types of machines for a
manufacturing process. Machine A has an immediate cost of $87,000,
and its salvage value at the end of 8 years of service life is
$29,000. The operating costs of this machine are estimated to be
$5700 per year. Extra income taxes are estimated at $1500 per year.
Machine B has an immediate cost of $44,000, and its salvage value
at the end of 8 years' service is neglible. The annual...

"A company is considering two types of machines for a
manufacturing process. Machine A has an immediate cost of $61,000,
and its salvage value at the end of 4 years of service life is
$14,000. The operating costs of this machine are estimated to be
$3900 per year. Extra income taxes are estimated at $1800 per
year.
Machine B has an immediate cost of $45,000, and its salvage value
at the end of 4 years' service is neglible. The annual...

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....

A company is considering buying a new machine and replacing the
old one. The managers have collected the following information:
Current machine (old machine): ISK
ISK
The purchase price
50,000
Accumulated depreciation
40,000
Annual operating expenses
5,000
market
1,500
Impact value after 5 years
0
Repair of current machine (old machine):
Repair costs, improvements
12,000
Annual operating expenses after improvements
2,000
New engine:
The purchase price
56,000
Annual operating expenses
1,000
Impact value after 5 years
0
1. What is...

Two machines, A and B, which perform the same functions,
have the following costs and lives.
Type
Initial cost
Annual maintainence cost
Life
A
6200
500
5
B
6700
650
7
The two machines are mutually exclusive and the cost of
capital is 10 percent.
Which machine would you choose?

Capital Budgeting Exercise 1
You are considering the purchase of one of two machines used in
your manufacturing plant. Machine A has a life of two years, costs
$1500 initially, and then $400 per year in maintenance costs.
Machine B costs $2000 initially, has a life of three years, and
requires $300 in annual maintenance costs. Either machine must be
replaced at the end of its life with an equivalent machine. Which
is the better machine for the firm? The...

Suppose that your firm is trying to decide between two machines
that will do the same job. Machine A costs $50,000, will last for
ten years and will require operating costs of $5,000 per year. At
the end of ten years it will be scrapped for $10,000. Machine B
costs $60,000, will last for seven years and will require operating
costs of $6,000 per year. At the end of seven years it will be
scrapped for $5,000. Which is a...

Suppose that your firm is trying to decide between two machines
that will do the same job. Machine A costs $50,000, will last for
ten years and will require operating costs of $5,000 per year. At
the end of ten years it will be scrapped for $10,000. Machine B
costs $60,000, will last for seven years and will require operating
costs of $6,000 per year. At the end of seven years it will be
scrapped for $5,000. Which is a...

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