Upsy Daisy Inc. is analyzing two machines to determine which one it should purchase. The company requires a 15% rate of return and uses straight-line depreciation to a zero book value over the life of its equipment.
Machine A has a cost of $900,000, annual operating costs of $30,000, and a 4-year life. Machine B costs $1,100,000, has annual operating costs of $20,000, and has a 5-year life. Whichever machine is purchased will be replaced at the end of its useful life in perpetuity.
Compute the equivalent annual cost for each machine and based on this cost, determine which machine should be purchased.