SMU Inc. is considering two potential machinesto produce their Mustang logo hats forever. Thered machine has an equivalent annual cost of$75,000 per year. The blue machine would cost$100,000 to purchase, would cost $20,000 eachyear to maintain, and would last for 10 years. Atthe end of year 10, the blue machine could besold for $10,000. Assume the appropriatediscount rate is 10% and ignore taxes. What isthe equivalent annual cost of the blue machine,and which machine should the companychoose?$85,432... chooseBlue Machine EACblue machineBlue Machine EAC $82,390... choosered machine$35,647 ... chooseBlue Machine EACblue machine$15,783... chooseBlue Machine EACblue machine

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Asked Sep 29, 2019
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Please show all equations and work as needed. Make the correct answer clear. If possible, please type work so it can be copied. Thank you.

SMU Inc. is considering two potential machines
to produce their Mustang logo hats forever. The
red machine has an equivalent annual cost of
$75,000 per year. The blue machine would cost
$100,000 to purchase, would cost $20,000 each
year to maintain, and would last for 10 years. At
the end of year 10, the blue machine could be
sold for $10,000. Assume the appropriate
discount rate is 10% and ignore taxes. What is
the equivalent annual cost of the blue machine,
and which machine should the company
choose?
$85,432... choose
Blue Machine EAC
blue machine
Blue Machine EAC $82,390... choose
red machine
$35,647 ... choose
Blue Machine EAC
blue machine
$15,783... choose
Blue Machine EAC
blue machine
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SMU Inc. is considering two potential machines to produce their Mustang logo hats forever. The red machine has an equivalent annual cost of $75,000 per year. The blue machine would cost $100,000 to purchase, would cost $20,000 each year to maintain, and would last for 10 years. At the end of year 10, the blue machine could be sold for $10,000. Assume the appropriate discount rate is 10% and ignore taxes. What is the equivalent annual cost of the blue machine, and which machine should the company choose? $85,432... choose Blue Machine EAC blue machine Blue Machine EAC $82,390... choose red machine $35,647 ... choose Blue Machine EAC blue machine $15,783... choose Blue Machine EAC blue machine

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Expert Answer

Step 1

If C0 is the cost to purchase the machine, S is the salvage value at the end of year n and C is the annual maintenance cost over the life of n years then equivalent annual cost, EAC is given by the expression on the white board. r is the discount rate

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(Co1+r C+1- (1+ r)" n EAC

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Step 2

C0 = 100,000; C = 20,000; n = 10, r = 10% = 0.1,

Hence, E...

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20000 (100, 000 X 0.1 (1+0.1) EAC 20, 000+ (10.1)-10 1 E AC = 20. 000+90, 144,57 - 0.1 35, 647.09 0.61

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