A company can purchase Machine A costing ₹600000 with a 10-year life or Machine B costing ₹400000 with a 6-year life. Annual maintenance for Machine A is ₹20000 and for Machine B is ₹40000.
Which is the better long-term decision?
Show answer & explanation
Correct answer: C
Explanation
To determine the better decision, calculate the annual cost for each machine:
• Machine A:
Total cost over 10 years = Purchase cost + (10 × Annual maintenance)
= ₹6,00,000 + (10 × ₹20,000) = ₹8,00,000
Annual equivalent cost = ₹8,00,000 / 10 = ₹80,000 per year
• Machine B:
Total cost over 6 years = Purchase cost + (6 × Annual maintenance)
= ₹4,00,000 + (6 × ₹40,000) = ₹6,40,000
Annual equivalent cost = ₹6,40,000 / 6 ≈ ₹1,06,667 per year
Since Machine A has a lower annual cost (₹80,000 < ₹1,06,667), it is the better long-term choice.
Correct Answer: Buy Machine A (Option C)