Your firm has to replace one of its fender-bender machines. One of your financial wizards has determined that the appropriate discount rate for the machine cash flows is 10%. Your firm has two alternatives.
1. Fender-bender Machine A costs $400,000 and produces annual cash flows of $200,000 at the end of each of its 6 years of life.
2. Fender-bender Machine B costs $200,000 but has only a 2-year life. However, it produces a $300,000 annual cash flow at the end of each of these 2 years.
Calculate the equivalent annuity cash flow (EAC) and determine which machine is preferable.