Precision Tool is analyzing two machines to determine which one it should purchase

Finance Dec 11, 2020

Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent 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 $892,000, annual operating costs of $28,200, and a 4-year life. Machine B costs $1,118,000, has annual operating costs of $19,500, and has a 5-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Precision Tool purchase and why?

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Please find attachment.

As Equivalent Annual Cost for Machine A is lower than Machine B. So, Machine A is preferrable.

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