Question

15. XYZ, Inc. is considering updating one of its existing machines. They will pick one from the following two machines. The first one costs $150,000 to install, $20,000 to operate per year for 10 years. It will be sold for $50,000 ten years after the installation (t=10). The second one costs $240,000 to install, $12,000 to operate per year for 16 years. It will be sold for $54,000 sixteen years after the installation (t=16). The firm’s cost of capital is 8%. What is the equivalent annual annuities of the best machine? A. $39,158.61 B. $38,902.95 C. $37,465.61 D. $37,333.70 E. $35,068.25

Answer 1

Solution :

The Second Machine has the best/ lowest Equivalent Annual Annuity.

The equivalent annual annuities of the best machine i.e., Second Machine = $ 37,333.70

The solution is Option D. $ 37,333.70

Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.