The Chief Operations and Facilities Executive informs the investment committee that they can no longer work with an existing widget 3-D maker and need to replace it. He has looked into two options for a new 3-D maker and is presenting the pros and cons of Machine A and Machine B. Machine A costs less, but requires more maintenance and doesnt last as long as Machine B, which costs more. He needs a finance professional to help determine which is better from a financial standpoint.

Machine	A	B
Cost	$100,000	$125,000
Annual Maintenance	$5,000	$3,000
Life span	5 years	7 years
Residual Value	$0	$0

You realize that you cannot simply use a NPV analysis because the machines have different lifetimes. You apply an EAC (equivalent annual annuity) calculation. You use a discount rate of 9% which is your cost of borrowing from the bank on equipment loans. The better machine is:

1. Machine A because its EAC is higher than B
2. Machine A because its EAC is lower than B
3. Machine B because its EAC is higher than A
4. Machine B because its EAC is lower than A