Anderson Inc. needs to replace their rapid prototyping machine.

They can purchase an injection molding based machine at a cost of $600,000. This machine will reduce before tax operating expenses by $80,000 per year, This machine will be depreciated to a value of zero on a straight line basis for six years and will need to be replaced after six years and will be scrapped as worthless. Alternatively they can buy a layering based machine at a cost of $350,000. This machine will reduce before tax operating expenses by $45,000 per year. This machine will be depreciated to a value of zero on a straight line basis over four years and will need to be replaced after four years and will be scrapped as worthless.

If Anderson has a 20% tax rate and a 10% cost of capital which machine do they prefer?

Provide the Equivalent Annual Annuity of each option and identify which is the best choice.

1a. EAA Option 1

1b. EAA Option 2

1c. Which Machine is the best choice?