Question

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing purchase prices, annual maintenance costs, and life spans. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: A) longest life. B) highest annual operating cost. C) lowest annual operating cost. D) highest equivalent annual cost. E) lowest equivalent annual cost.

Answer 1

The best decision is to select the machine that has the lowest equivalent annual cost.

In accounting, the equivalent annual cost means the incurred cost of owning, operating, and maintaining an asset over its entire useful life

Usually, the higher the EAC, the lesser the profit made because the chunk of the revenue will be spent to maintain the asset for continuation of production in such business.

Therefore, the machine with the lowest equivalent annual cost sould be considered,

Therefore, the answer is E because it is the best decision to select the machine that has the lowest equivalent annual cost..

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