Calculate the equivalent annual cost of purchasing

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Reference no: EM131587468

Company A is intends to purchase a machine.

Plan 1 is buying a new machine paying 50,000. Its operating costs are 10,000 a year but in 4 years, the machine will require a 15,000 overhaul. Thereafter operating costs will remain at 10,000 per year until the machine is finally scrapped with zero salvage value in year 8.

Plan 2 is buying used machine cost for 20,000. If it is purchased, it will need an immediate 5,000 overhaul. Thereafter operating costs will be 20,000 a year until the machine is finally scrapped with zero salvage value in year 5.

The machine have life span of 8 years and 5 years respectively. The company's opportunity cost of capital is 14%.

#annuity factor : [1/r - 1/r(1+r)^t]

so here is the question: Calculate the equivalent annual cost of purchasing the newer and older machine and determine which machine should be purchased.

Reference no: EM131587468

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