ExpertACCA · Question 05 · Investment Appraisal
'SteelForge Inc' is deciding between two heavy forging machines. Machine A has a life of 3 years and a Net Present Value (NPV) of costs of $120,000. Machine B has a life of 5 years and an NPV of costs of $180,000. The company's cost of capital is 10%.
The 3-year annuity factor at 10% is 2.487. The 5-year annuity factor at 10% is 3.791.
Based on the Equivalent Annual Cost (EAC), which machine should be chosen and why?
'SteelForge Inc' is deciding between two heavy forging machines. Machine A has a life of 3 years and a Net Present Value (NPV) of costs of $120,000. Machine B has a life of 5 years and an NPV of costs of $180,000. The company's cost of capital is 10%.
The 3-year annuity factor at 10% is 2.487. The 5-year annuity factor at 10% is 3.791.
Based on the Equivalent Annual Cost (EAC), which machine should be chosen and why?
Answer options:
Machine A, because its total NPV of costs ($120,000) is lower than Machine B's.
Machine A, because its EAC is $48,251, which is lower than Machine B's EAC.
Machine B, because its EAC is $47,481, which is lower than Machine A's EAC.
Machine B, because it has a longer operational life, delaying replacement costs.
How to approach this question
Full Answer
Common mistakes
Practice the full ACCA FM — Financial Management Practice Exam 3
32 questions · hints · full answers · grading