Use the equivalent annual annuity method

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Reference no: EM13923046

The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is $400,000 and it will last for 7 years before it needs to be replaced. The cost of operating machine A each year is $50,000. The initial cost of Machine B is $280,000 and it will last for 5 years before it needs to be replaced. The cost of operating machine B is $70,000 in cash flow per year. If the required rate of return is 9%,

(a) Calculate the 7 year and 5 year annuity factors at 9% annual interest.

(b) Using the annuity factors, find the PV of Machine A and Machine B including all costs (initial + operating).

(c) Which machine is a better choice for the company after considering the different lives of the projects? (Note: be sure to use the equivalent annual annuity method)

Reference no: EM13923046

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