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Arc Enterprise is analyzing two machines to determine which one it should purchase. Whichever machine is...

Arc Enterprise is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 14 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $651,000, annual operating costs of $32,000, and a 5-year life. Machine B costs $472,000, has annual operating costs of $41,000, and a 3-year life. The firm currently pays no taxes.

Which machine should be purchased and why? (Hint: Calculate the NPV of the costs of each machine, then compare their EACs)

Machine A; because it will save the company about $35,217 a year

Machine A; because it will save the company about $22,680 a year

Machine B; because it will save the company about $35,217 a year

Machine B; because it will save the company about $22,680 a year

Machine A; because it will save the company about $18,450 a year

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