Managers of Coronado Embroidery have decided to purchase a new monogram machine and are considering two...

Managers of Coronado Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $114,000 and is expected to last five years. The second machine costs $182,000 and is expected to last eight years. Assume that the opportunity cost of capital is 8 percent. What is the equivalent annual cost for each system? (Do not round intermediate calculations. Round final answers to 2 decimal places, e.g. 2.75.) Equivalent Annual Cost First machine $ Second machine $ Which machine should Coronado Embroidery purchase? Coronado Embroidery should purchase the machine.

Expert Solution

Machine 1
Discount rate	8.000%
Year	0	1	2	3	4	5
Cash flow stream	-114000.000	0.000	0.000	0.000	0.000	0.000
Discounting factor	1.000	1.080	1.166	1.260	1.360	1.469
Discounted cash flows project	-114000.000	0.000	0.000	0.000	0.000	0.000
NPV = Sum of discounted cash flows
NPV Machine 1 =	-114000.00
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor


Equvalent annuity(EAA)=	-28552.04

Required rate =	8.000%
Year	0	1	2	3	4	5
Cash flow stream	0.00	-28552.04	-28552.04	-28552.04	-28552.04	-28552.04
Discounting factor	1.000	1.080	1.166	1.260	1.360	1.469
Discounted cash flows project	0.000	-26437.070	-24478.769	-22665.527	-20986.599	-19432.036
Sum of discounted future cashflows =	-114000.00
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Machine 2
Discount rate	8.000%
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-182000.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000
Discounting factor	1.000	1.080	1.166	1.260	1.360	1.469	1.587	1.714	1.851
Discounted cash flows project	-182000.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000
NPV = Sum of discounted cash flows
NPV Machine 2 =	-182000.00
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor


Equvalent annuity(EAA)=	-31670.69

Required rate =	8.000%
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	0.00	-31670.69	-31670.69	-31670.69	-31670.69	-31670.69	-31670.69	-31670.69	-31670.69
Discounting factor	1.000	1.080	1.166	1.260	1.360	1.469	1.587	1.714	1.851
Discounted cash flows project	0.000	-29324.710	-27152.509	-25141.212	-23278.900	-21554.537	-19957.905	-18479.541	-17110.686
Sum of discounted future cashflows =	-182000.00
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Choose Machine 1 as it has lower EAC

jeff jeffy answered 2 years ago

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