Question

There are two alternative machines for a manufacturing process. Both machines have the same output rate, but they differ in costs. Machine A costs $20,000 to set up and $8,000 per year to operate. It must be completely replaced every 3 years, and it has no salvage value. Machine B costs $50,000 to set up and $2,160 per year to operate. It should last for 5 years and has no salvage value. The costs of two machines are shown below.

	0	1	2	3	4	5
Machine A	20,000	8,000	8,000	8,000
Machine B	50,000	2,160	2,160	2,160	2,160	2,160

Assuming the cost of capital is 10%,
1. find the equivalent annual cost of Machine A in Box 1. Round it to a whole dollar, and no comma or the dollar sign.
2. find the EAC of Machine B in Box 2. The same format as box 1.
3. Based on the equivalent annual cost method, type in Box 3 which machine do you recommend, Machine A or Machine B.

Question 18 options:

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Johnson Jets is considering two mutually exclusive projects. Project A has an up-front cost of $122,000 (CF₀ = -122,000), and produces positive after-tax cash inflows of $30,000 a year at the end of each of the next six years. Project B has an up-front cost of $60,000(CF₀ = -60,000) and produces after-tax cash inflows of $20,000 a year at the end of the next four years. Assuming the cost of capital is 10.5%,
1. Compute the equivalent annual annuity of project A in box 1. Round the EAA to a whole dollar without the dollar sign or comma, e.g., 3452 (non-negative number)
2. Compute the equivalent annual annity of project B in box 2. The same format as box 1.
3. Decide which project to undertake in box 3, either Project A or Project B.

Question 17 options:

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Answer 1

EAC SHOULD BE NEGATIVE AS THERE ARE ONLY OUTFLOWS, BUT FIGURES ARE GIVEN WITHOUT NEGATIVE SIGN, SO NOT PUT NEGATIVE SIGN