Question

"You plan to operate the same type of machine for 10 years. Machine A lasts 5 years and Machine B lasts 10 years. Machine A costs $6,000 and Machine B costs $8,000. The salvage value of Machine A is $4,000 and the salvage value of Machine B is $2,500. Annual operation and maintenance costs are $5,000 for Machine A and $5,100 for Machine B. Both machines can be purchased in the future at the same price as today, and their salvage values and annual costs will remain as they are now. Your MARR is 7.9%. Enter the Annual Equivalent Cost (AEC) as a POSITIVE number for the machine that should be selected."

Answer 1

Machine A:

present value of annual cost /(benefit)= [PVA 7.9%,5 * Annual operating cost ]-[PVF 7.9%,5 * Salvage value]

         = [4.00326*5000]-[.68374*4000]

           = 20016.3-2734.96

           = 17281.34

Total cost = 6000+17281.34 = 23281.34

Equivalent cost =Total cost /PVA7.9%,5

                      = 23281.34/4.00326

                     = $ 5815.60

Machine B:

Present value of annual cost/(benefit) =[PVA 7.9%,10*Annual cost]-[PVF7.9%,10*Salvage value]

               = [6.74045*5100]-[.46750*2500]

               = 34376.31- 1168.75

               = $ 33207.56

Total cost = 33207.56+8000 = 41207.56

Equivalent annual cost =Total cost/ PVA 7.9%,10

                   = 41207.56/6.74045

                      = $ 6113.47

SINce the equivalent annual cost of machine A is lower than machine B ,machine A should be selected .

**present value annuity factor and present value calculator can be find usinf financial calculator or from there table respectively.