The brew master at Appalachian Ale has asked you to help choose betwee

The brew master at Appalachian Ale has asked you to help choose between two alternatives for a plant expansion.

The first choice is a new brew system that costs $180,000 with annual maintenance costs of $17,000, an expected life of 15 years and a required rate of return of 12%. the alternative brew system costs only $98,000, requires $9,000 per year in maintenance, will last only 9 years and has a required return of 10%. Calculate the equivalent annual cost of each system. Based on your results only, which system would you recommend?

ANSWER

The first sytem’s EAC is $43,428.36, the second system’s EAC is $26,016.77 and is the preferred choice based on this information.