You Are Considering the Purchase of One of Two Machines

Multiple Choice

You are considering the purchase of one of two machines required in your production process.Machine A has a life of two years.Machine A costs $50 initially and then $70 per year in maintenance.Machine B has an initial cost of $90.It requires $40 in maintenance for each year of its three-year life.Either machine must be replaced at the end of its life.Which is the better machine for the firm? The discount rate is 15% and the tax rate is zero.

A) Machine A as EAC for machine A is $100.76
B) Machine B as EAC for machine B is $79.42
C) Machine A as PV of costs for machine A is $163.80
D) Machine B as PV of costs for machine B is $181.33Machine A: Annuity factor = (1/.15) × (1 - (1/(1.15^2) ) ) = 1.6257.Machine B: Annuity factor = (1/.15) (1 - (1/(1.15^3) ) ) = 2.2832.Costs:PV(A) = 50 + 70 (1.6257) = 163.80; EAC = 163.80/(1.6257) = 100.76;