Texts: XYZ Limited is considering purchasing one of the two machines. Both machines meet the company's production requirements, but they have different lifespans. The company must evaluate the machines using the Equivalent Annual Cost (EAC) method and decide which machine they should purchase. The capital expenditure will be funded in line with the company's existing assets. The machines have the following costs:
Machine A Machine B
Purchase Price $100,000 $80,000
Annual operating expenses Year 1 $15,000 $20,000
Year 2 $15,000 $25,000
Year 3 $15,000 $30,000
Year 4 $15,000 $30,000
Year 5 $15,000
Year 6 $15,000
Which machine should XYZ Limited purchase?
B) In calculating the NPV of a project, should we use all of the cash flows associated with the project or incremental free cash flows from the project? Why? Explain your answer.