Question

Machine X has an upfront cost of $469,500 and annual operating costs of $14,175 over its 4-year life. Machine Y costs $415,000 upfront and has annual operating costs of $6,700 over its 3-year life. Whichever machine is purchased will continue to be replaced at the end of its useful life. If the required return is 17.75% for both machine, what is the absolute value of the dollar difference between the EACs of the two machines?

Answer 1

Project A	Year	Cash flow	× discount factor	Present value
		$     469,500		$ 469,500.00
	1	$        14,175	0.849257	$    12,038.22
	2	$        14,175	0.721237	$    10,223.54
	3	$        14,175	0.612516	$      8,682.41
	4	$        14,175	0.520183	$      7,373.60
	Total		2.703193	$ 507,817.76
(a)	EAC - A	507817.76/ 2.703193	$ 187,858.48
Project B	Year	Cash flow	× discount factor	Present value
		$     415,000		$ 415,000.00
	1	$          6,700	0.849257	$      5,690.02
	2	$          6,700	0.721237	$      4,832.29
	3	$          6,700	0.612516	$      4,103.86
	Total		2.183010	$ 429,626.17
(b)	EAC - B	429626.17/ 2.18301	$ 196,804.50
(a) - (b)				$      8,946.01

Answer is $8,946

please rate.