ABC Company is considering purchasing manufacturing equipment from two different suppliers. Equipment A has a purchase price

Question:

ABC Company is considering purchasing manufacturing equipment from two different suppliers. Equipment A has a purchase price of $2.9 million and will cost $80,000, pre tax, to operate on an annual basis. Equipment B, on the other hand, has an initial cost of $5.7 million and costs $69,000, pre-tax, annually. Equipment A will have to be replaced every 8 years and has a salvage value of $340,000, while equipment B has a useful life of 12 years with a salvage value of $420,000. Both equipment sets are in CCA class 9. The tax rate is 35 percent, and the discount rate is 13 percent. Calculate the EAC for each equipment set, and decide which manufacturing equipment to purchase.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...