Question

Mariposa Inc is considering improving its production process by acquiring a new machine. There are two machines management is analyzing to determine which one it should purchase. The company requires a 14% rate of return and uses straight-line depreciation to a zero book value. Machine A has a cost of $290,000, annual operating costs of $8,000, and a 3-year life. Machine B costs $180,000, has annual operating costs of $12,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Mariposa purchase and why? (Round your answer to whole dollars.)

Answer 1

Machine B lowers the annual cost of the equipment and it will save about $ 11600 per year
Steps		Machine A	Machine B
	Cost of Machines	2,90,000	180000
	Annual Operating cost	8,000	12000
	Year of life	3	2
Step 1	Rate of return/Discount rate	0.140	0.14
Step 2	1-(1+Discount rate)^-Period	0.3250	0.2305
Step 3	Discount rate/1-(1+Discount rate)^-Period	0.43	0.61
Step 4	Cost of Machines * step 3	1,24,912	1,09,312
	Equivalent Annual Cost (Step4 + Annual cost)	1,32,912	1,21,312
	Annual Savings by Machine B	11,600