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The Best Company is reviewing two options for replacing a piece of machinery. The first machine...

The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $86,500 and has a four-year life. The second machine costs $123,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of their life. Determine which machine to purchase? The discount rate is 20%.

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Expert Solution

Solution :

Since the life of the two machines under consideration is different , the Equivalent annual cost method should be used for making the decision.

As per the Equivalent annual cost method, the machine with the lowest equivalent annual cost should be selected or purchased.

The Equivalent annual cost of Machine 1 with life of 4 years = $ 33,414.46

The Equivalent annual cost of Machine 2 with life of 6 years = $ 36,986.92

Since Machine 1 has the lower Equivalent Annual cost of = $ 33,414.46, the same should be selected.

Hence, the machine to be purchased is Machine 1.

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

jeff jeffy answered 2 years ago
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