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Capital Budgeting Exercise 1 You are considering the purchase of one of two machines used in your manufacturing plant.

Capital Budgeting Exercise 1

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $1500 initially, and then $400 per year in maintenance costs. Machine B costs $2000 initially, has a life of three years, and requires $300 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 6% and the tax rate is zero. 

Year

0

1

2

3

Machine A's Cash Flows

-1500

-400

-400


Machine B's Cash Flows

-2000

-300

-300

-300


Machine A's EAC 




Machine B's EAC






Which machine do you choose? Explain.



(PLEASE SHOW THE EXCEL CALCULATIONS SO I CAN UNDERSTAND THE PROCESS. THANKS!)

Top Answer

Machine B should be chosen due to Low... View the full answer

EAC A.JPG

6 comments
  • I can't understand how you calculated PVF at 5.5% (and also why you didn't use 6%).
    • aleslie2749
    • Dec 02, 2018 at 12:29pm
  • Sorry that is 6%.. i wrongly wrote 5.5%. all the calculations are done as per 6%.
    • pratyushlohani
    • Dec 02, 2018 at 12:35pm
  • Present Value factors for 6% = Year 1 0.9434, Year 2 0.8900, Year3 0.8396
    • pratyushlohani
    • Dec 02, 2018 at 12:37pm
  • I am struggling to determine the formula to get the [email protected]%
    • aleslie2749
    • Dec 02, 2018 at 12:38pm
  • i.e., how you land at 0.9434. Also the formula for the present value column.
    • aleslie2749
    • Dec 02, 2018 at 12:39pm
  • Year 1 1/1.06, Year 2 1/1.06^2, Year 3 1/1.06^3
    • pratyushlohani
    • Dec 02, 2018 at 12:40pm

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