A forming die (Die A) which is used in the manufacture of your product has an acquisition cost of $70,000, a useful life of two years and an annual maintenance cost of $20,000. The die will be depreciated using MACRS with a rate of 50% per year. The die will be replaced every two years. The die has no salvage value. The firms Weighted Average Cost of Capital is 7 percent and that is considered an appropriate discount rate for this evaluation. Your firm has tax rate of 20%.

An alternative die (Die B) that is more expensive to acquire, costs less to maintain and that has a longer life has an EAC of $52,743.

What is the equivalent annual cost, or EAC of using die A? ____________________

.

Which die would you select (A or B)? ________________

Please use the template below to develop your answer:

EAC Die A:

Question

A forming die (Die A) which is used in the manufacture of your product has an acquisition cost of $70,000, a useful life of two years and an annual maintenance cost of $20,000. The die will be depreciated using MACRS with a rate of 50% per year. The die will be replaced every two years. The die has no salvage value. The firms Weighted Average Cost of Capital is 7 percent and that is considered an appropriate discount rate for this evaluation. Your firm has tax rate of 20%.

An alternative die (Die B) that is more expensive to acquire, costs less to maintain and that has a longer life has an EAC of $52,743.

What is the equivalent annual cost, or EAC of using die A? ____________________

.

Which die would you select (A or B)? ________________

Please use the template below to develop your answer:

EAC Die A:

Accepted Answer

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