Question

13-4 Two mutually exclusive machines are under consideration. Man cost of $400,000, an annual operating expense of $10,000, and an of four years. Machine B has a cost of $700,000, an annual Ope of $6,000, and an economic life of seven years. The time value of percent. Assume that the firm will invest in projects of precisely thes acteristics as its current project under consideration. Choose the more d project on the basis of the annualized cost. on Machine A has a and an economic life nual operating expense be value of money is 10 ecisely the same char- ose the more desirable To de ner, few basic far

Everything is the same except that Machine A’s cost is $500,000, annual operating cost of $50,000, economic life of five years. Machine B’s cost is $600,000, annual expense of $3,000, economic life of 8 years. The time value of money is 8%

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Answer 1

Project A
Initial Cost	500000
Operating cost for 5 years	50000
PVIFA (8%, 5 years)	3.992
PV of operating cost (operating cost * PVIFA)	199600
Initial Outflow (Initial cost + PV of operating cost)	699600
PVIFA (8%, 5 years)	3.992
Annualized cost (Initial outflow / PVIFA)	175251

Project B
Initial Cost	600000
Operating cost for 5 years	3000
PVIFA (8%, 8 years)	5.747
PV of operating cost (operating cost * PVIFA)	17241
Initial Outflow (Initial cost + PV of operating cost)	617241
PVIFA (8%, 5 years)	5.747
Annualized cost (Initial outflow / PVIFA)	107402

Project B is desirable as its annualized cost is less.