The firm is considering two machines: Machine A with initial investment of $10,000 and annual maintenance cost of $1,000. The life of the machine A is 4 years. Machine B with initial investment of $20,000 and annual maintenance cost of $800. The life of the machine B is 6 years. If the required rate of return is 10%, calculate the equivalent annual cost (EAC) of each machine and which machine company must choose? (A) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company must choose Machine B. (B) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company must choose Machine A. (C) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company must choose Machine B. (D) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company must choose Machine A.

The firm is considering two machines: Machine A with initial investment of $10,000 and annual maintenance cost of $1,000. The life of the machine A is 4 years. Machine B with initial investment of $20,000 and annual maintenance cost of $800. The life of the machine B is 6 years. If the required rate of return is 10%, calculate the equivalent annual cost (EAC) of each machine and which machine company must choose? (A) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company must choose Machine B. (B) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company must choose Machine A. (C) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company must choose Machine B. (D) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company must choose Machine A.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

The firm is considering two machines:
Machine A with initial investment of $10,000 and annual maintenance cost of $1.000.
The life of the machine A is 4 years.
Machine B with initial investment of $20,000 and annual maintenance cost of $800. The
life of the machine B is 6 years.
If the required rate of return is 10%, calculate the equivalent annual cost (EAC) of each
machine and which machine company must choose?
(A) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company
must choose Machine B.
(B) The EAC of Machine A is $4,154.71 and Machine B is $5,392.15. The Company
must choose Machine A.
(C) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company
must choose Machine B.
(D) The EAC of Machine A is $3,169.87 and Machine B is $3,484.21. The Company
must choose Machine A.
Answer
A
D.

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