7 An industrial firm uses an economic analysis to determine

7. An industrial firm uses an economic analysis to determine which of two different machines to purchase. Each machine is capable of performing the same task in a given amount of time. Assume the minimum attractive rate of return is 8%. Use the following data in this analysis. Machine X Machine Y $12,000 13 $4000 $175 Initial cost Estimated life (years) Salvage value Annual maintenance cost Which machine should the firm choose and why? A) machine X because (EUAC)x(EUAC) C) machine Y because (EUAC) (EUAC) D) machine Y because (EUAC)>(EUAC) $6000 $150

Solution

Solution: Machine X because EUACx < EUACy

Working:

EUACx = $6,000 (A/P,8%,7) + $150 = 1302

EUACy = ($12,000 - $4,000) (A/P,8%,13) + $4000* 0.08 + 175 = 1507.17

Select Machine X because EUACx < EUACy