A company's management is considering to buying a new machine. Anew machine will cost $25,000. Annual operating and maintenancecosts will be $8,000 in the first year, increasing by $400 eachyear. Assume the machine depreciates by $4,000 per year accordingto straight-line depreciation. Assume the machine can be re-sold atits book value at any time.
a) Owning the proposed new machine for how many years willresult in the minimum EAC if the interest rate is 8%? (showsteps)
b) If the old machine reached its minimum EAC several years agoand its operating and maintenance cost this year are expected to be$9,000, should the arena’s management buy the new machine? Assumethe operating and maintenance costs of the old machine willincrease, and assume it has a salvage value of zero.
