Answer

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We invest in Machine 1 since it has the lower EAC

↓Steps Explained:↓

Given Item A:
Investment cost of $4,500.00
a lifetime of 3 periods
Maintenance cost = $3,000.00

Given Item B:
Investment cost of $150,000.00
a lifetime of 8 periods
Maintenance cost = $7,500.00

Cost of capital = 5%
Calculate the Equivalent Annual Cost

Calculate v:

v =	1
	1 + Cost of Capital

v =	1
	1 + 0.05

v =	1
	1.05

v = 0.9524

Calculate Discount Factor for Item 1:

a_3\|0.05 =	(1 - v^{Asset Lifetime})
	Cost of Capital

a_3\|0.05 =	(1 - 0.9524³)
	0.05

a_3\|0.05 =	(1 - 0.863889429824)
	0.05

a_3\|0.05 =	0.136110570176
	0.05

a_3|0.05 = 2.7222

Excel Formula: =PV(0.05,3,-1)

Calculate Discounted Investment 1:

DI 1 =	Investment Cost
	a_3\|0.05

DI 1 =	$4,500.00
	2.7222

DI 1 = $1,653.07

Calculate EAC for Item 1

EAC1 = DI 1 + Maintenance Cost

EAC1 = $1,653.07 + $3,000.00

EAC1 = $4,653.07

Calculate Discount Factor for Item 2:

a_8\|0.05 =	(1 - v^{Asset Lifetime})
	Cost of Capital

a_8\|0.05 =	(1 - 0.9524⁸)
	0.05

a_8\|0.05 =	(1 - 0.67694766390752)
	0.05

a_8\|0.05 =	0.32305233609248
	0.05

a_8|0.05 = 6.461

Excel Formula: =PV(0.05,8,-1)

Calculate Discounted Investment 2:

DI 2 =	Investment Cost
	a_8\|0.05

DI 2 =	$150,000.00
	6.461

DI 2 = $23,216.22

Calculate EAC for Item 2

EAC2 = DI 2 + Maintenance Cost

EAC2 = $23,216.22 + $7,500.00

EAC2 = $30,716.22

Determine Conclusion: