Use the following information to answer questions #11 through #13.

The equipment below is required for your business. Assume each will be replaced as it wears out and that straight-line depreciation to zero is used in each case. The required return is 10%. Ignore taxes.

Machine A Initial cost $80,000, Operating Cost/year 7,000, Life 8 yrs

Machine B Inital Cost $125,000, Operating Cost/year 10,000, Life 10 yrs

What is the Equivalent Annual Cost (EAC) of machine A? a. $117,345 b. $ 56,875 c. $ 45,095 d. $ 21,996 e. $ 3,625

What is the EAC of machine B? a. $ 7,653 b. $10,343 c. $19,963 d. $30,343 e. $38,773

Which machine should you buy and why?

a. Machine A because it has a higher NPV.

b. Machine A because it effectively costs less to operate each year.

c. Machine B because it has a higher NPV.

d. Machine B because it effectively costs less to operate each year.

e. Neither, since the NPV for both is negative.