Question

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis?A. Differing costs with no replacement at end of life.B. Differing lives and planned replacement at end of life.C. Differing lives with no replacement at end of lifeD. Differing manufacturers and differing operating costs.E. Differing required returns with no replacement at end of life.

Answer 1

Answer:

B) Differing lives and planned replacement at end of life.

Explanation:

The equivalent annual cost (EAC) method of analysis refers to the equivalent annual cost of owning and operating a machine. It is calculated by:

EAC = NPV of (the machine + operation costs) / PV of annuity factor

This method is used to compare the values of machines (or other assets) that have different useful lives, usually you should choose the machine (or asset) with the lowest EAC.