For the SECOND machine, the COSTS (in thousands) for operation are:

T=0: 12

T=1: 5

T=2: 5

T=3: 5

When r = 6%, find the Equlivalent Annual Annuity for the 2nd machine:

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Which machine (FIRST or SECOND) is preferable (less costly) for the firm?:

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Example: Equivalent Annual Annuity Machine #1 costs 15,000 initially, and 4,000 per year to operate. First, one calculated the PV of all costs relate to the machine, and than we calculate the costs as an Annual Equivalent Annuity )bottom portion of the spreadsheet below) 2 4 9.61 3 PV at 6%=r 4 $25.69 9.61 COSTS in Thous. Year: Machine 1 Equiv. Annual Annuity: PV FV N 1 CPT PMT = 0 1 15 4 9.61 $25.69 0 3 years 6% ($9.61) Annual Equivalent Annuity