EECS Inc. must decide which of the following two machines they should acquire to use in a production to meet a certain level of demand, if the company's minimum attractive rate of return (MARR) is 10%.
Machine A Machine B
First cost $16,000 $36,000
Annual O&M costs $1,200 $1,000
Annual benefit $7,000 $10,000
Useful life NA years 10 years
Salvage value $0 $0
For the two machines above, if the useful lives of the two machines are the same at 10 years (i.e. NA = 10 years), use the method of incremental IRR analysis to determine the incremental IRR. Then decide which machine is better.
(Note: (P/A,15%,10) = 5.0188, and (P/A,16%,10) = 4.8332)
b) Let NA = 8 years. The company is expected to be in this business for a long time and it is expected that there will be very little change in technology. To use either the EAW or the PW method to decide which machine is better, what assumption will be needed? Then use it and the EAW method to decide which machine is better? (Note the 10% Interest Table is provided.) Finally, if you want to use the PW method, what study period would you have to use?
4c) Again assume that the service life of Machine A is 8 years. Now suppose you only want to use the machine for 12 years. If you go with Machine B, you will lease a similar machine for use in the final two years for about $10,000 (note that the same annual O&M costs and benefits remain the same as before in this final year). For Machine A, at the end of year 8, you will buy a second machine similar to first to be used in year 9 to 12, and you will sell the machine at the end of year 12 for $8,000. Draw an appropriate cash flow diagram for each case. Which method would you use to compare the two options and why? (Don't do any calculations beyond this point.)