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Compute the Equivalent Annual Cost for the two machines described below. Assume that both do identical...

Compute the Equivalent Annual Cost for the two machines described below. Assume that both do identical jobs, both will be depreciated using the straight line method to zero salvage value, will have zero scrap value at the end of their useful lives. Use a 10% discount rate and a 30% tax rate.

Machine A
Useful life 7 years
Initial cost $70,000
Annual operating costs $5,000 after-tax

Machine B
Useful life 4 years
Initial cost $30,000
Annual operating costs $8,000 after-tax

Important::
This is a multiple Answer question. Choose all correct answers.

Group of answer choices

The Equivalent Annual Cost of Machine A is $14,378

The Equivalent Annual Cost of Machine A is $16,378

The Equivalent Annual Cost of Machine A is $19,378

The Equivalent Annual Cost of Machine B is $9,464

The Equivalent Annual Cost of Machine B is $15,214

The Equivalent Annual Cost of Machine B is $17,464

Expert Solution

Machine A

Time line		0	1	2	3	4	5	6	7



Cost of new machine		-70000

=Initial Investment outlay		-70000

										100.00%




Depreciation	Cost of equipment/no. of years		-10000	-10000	-10000	-10000	-10000	-10000	-10000	0	=Salvage Value




=after tax operating cash flow			-5000.00	-5000.00	-5000	-5000	-5000	-5000	-5000





+Tax shield on salvage book value	=Salvage value * tax rate								0
=Terminal year after tax cash flows									0

Total Cash flow for the period		-70000	-5000.00	-5000.00	-5000.00	-5000	-5000	-5000	-5000
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051	1.771561	1.9487171
Discounted CF=	Cashflow/discount factor	-70000	-4545.454545	-4132.231405	-3756.574005	-3415.1	-3104.607	-2822.37	-2565.79059
NPV=	Sum of discounted CF=	-94342.09

Year or period		0	1	2	3	4	5	6	7
EAC			-19378.38414	-19378.38414	-19378.38414	-19378	-19378.38	-19378.38	-19378.3841
Discount factor=	(1+discount rate)^corresponding period		1.1	1.21	1.331	1.4641	1.61051	1.771561	1.9487171
Discounted CF=	Cashflow/discount factor		-17616.71285	-16015.1935	-14559.26682	-13236	-12032.45	-10938.59	-9944.17514
NPV=	-94342.09
EAC is equivalent yearly CF with same NPV =	-19378.38414

Machine B

Year or period		0	1	2	3	4
EAC			-17464.12298	-17464.12298	-17464.12298	-17464
Discount factor=	(1+discount rate)^corresponding period		1.1	1.21	1.331	1.4641
Discounted CF=	Cashflow/discount factor		-15876.47544	-14433.15949	-13121.05408	-11928
NPV=	-55358.92
EAC is equivalent yearly CF with same NPV =	-17464.12298

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