Question #2: Which Should We Buy?

• Using the EAC approach, which machine should we choose? Use the table below to plan your cash flows (Bold boxes are where #s should be).
• Neither machine will have a differential impact on revenue. No change in NWC is required. The straight line depreciation rate is 20%, the required return is 10% and the tax rate is 40%. There is no salvage values for either machine.

	Machine A	Machine B
Initial Cost	$150,000	$100,000
Pre-Tax Operating Cost	$65,000	$57,500
Expected Life (years)	8	5

Machine A: Cash Flows
Year	PV	0	1	2	3	4	5	6	7	8
OCF
Initial Cost
Total Cash Flows
Depreciation Tax Shield (Benefit)
NPV
EAC