Two machines are being considered by your company (see Table 2.1).

Table 2.1: The capital cost, operation and maintenance costs, and salvage value for two machine options having an 8-year design life.

ItemMachine AMachine B

Capital cost$24,000$32,000

O&M$2,600$1,200

Salvage Value$0$0

Use an equal comparison cost analysis based on annual cost to determine which machine should be purchased. Assume that the time value of money is 5.0% (annual interest rate).

Theory

Replace with needed theory

Assumptions

Replace with a list of assumptions

Solution

a) Draw and label the cash flow diagram for Machine A.

b) Compute the present worth of Machine A.

c) Draw and label the cash flow diagram for Machine B.

d) Compute the present worth of Machine B.

e) Do an equal comparison cost analysis of the two machines using their annual cost, anddetermine the best option