Your old machine has finally lost its productive usefulness. You are considering two potential new machines for replacement. Machine I will last for six years and will require annual operating costs of $250,000 per year. Machine II will last for 9 years and will require annual operating costs of $100,000. The initial costs of Machines I and II are $1,200,000 and $1,400,000, respectively. Assume an appropriate risk-adjusted discount rate of 9 percent.
a. Calculate the equivalent annual cost (EAC) for each machine. b. Which machine will be cheapest for the company to use?