Question

Machine X has an upfront cost of $379,500 and annual operating costs of $11,475 over its 4-year life. Machine Y costs $355,000 upfront and has annual operating costs of $5,740 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 14.75% 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
		$     379,500		$ 379,500.00
	1	$        11,475	0.871460	$    10,000.00
	2	$        11,475	0.759442	$      8,714.60
	3	$        11,475	0.661823	$      7,594.42
	4	$        11,475	0.576752	$      6,618.23
	Total		2.869477	$ 412,427.25
(a)	EAC - A	412427.25/ 2.869477	$ 143,729.07
Project B	Year	Cash flow	× discount factor	Present value
		$     355,000		$ 355,000.00
	1	$          5,740	0.871460	$      5,002.18
	2	$          5,740	0.759442	$      4,359.20
	3	$          5,740	0.661823	$      3,798.86
	Total		2.292725	$ 368,160.24
(b)	EAC - B	368160.24/ 2.292725	$ 160,577.60
(a) - (b)				$   (16,848.53)

Answer is 16,848.53

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