Problem:
You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $500 initially, and then $150 per year in maintenance costs. Machine B costs $650 initially, has a life of three years, and requires $100 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 10% and the tax rate is zero.
Year 0 1 2 3
Machine A Cash Flows
Machine B Cash Flows
Machine A EAC
Machine B EAC
Which machine do you choose?