You are evaluating two machines. We assume neither machine has impacts on sales. Machine I costs $320,000 and it has a fifteen-year life. It has pre-tax operating costs of $150,000 per year. Machine II costs $640,000 and it has a twenty-year life. It has pre-tax operating costs of $100,000 per year. For both machines, we use straight-line depreciation to zero over the machine's life. The pre-tax salvage values of both Machine I and Machine II are assumed to be zero at the end of its life. The marginal tax rate is 40% and the appropriate discount rate is 10%.

What is the equivalent annual cost (EAC) for each machine? What machine you should choose?

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