Question

Machines J and K have the following investment and operating costs:

Year          0                      1          2          3

J                 10000              1100    1200

K               12000              1100    1200    1300

Which machine is a better buy at a WACC of 10%?

Answer 1

J	Year	Cash flow	× discount factor	Present value
		$        10,000		$    10,000.00
	1	$          1,100	0.909091	$      1,000.00
	2	$          1,200	0.826446	$          991.74
	Total		1.735537	$    11,991.74
	EAC - J	11991.74/ 1.735537		$      6,909.52
K	Year	Cash flow	× discount factor	Present value
		$        12,000		$    12,000.00
	1	$          1,100	0.909091	$      1,000.00
	2	$          1,200	0.826446	$          991.74
	3	$          1,300	0.751315	$          976.71
	Total		2.486852	$    14,968.44
	EAC - K	14968.44/ 2.486852		$      6,019.03

Machine K is better as its Equivalent annual cost is lower.