CAF-7 · Chapter 13 · Question 7 of 15
A company is comparing two different machines that produce the exact same output but have different useful lives. Machine A lasts 3 years, and Machine B lasts 5 years. Which DCF technique must be used to properly compare and select the most cost-effective machine?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Equivalent Annual Cost (EAC)
Explanation
When deciding between assets with different useful economic lives (asset replacement cycles), comparing their raw NPVs is unfair. You must calculate the Equivalent Annual Cost (EAC) by dividing each machine's NPV of costs by its respective annuity factor.
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