The Times newspaper is trying to decide between two machines. Machine A costs $80,000 and is expected to last 12 years, with a $14,000 salvage value. The annual maintenance and operating expenses are $4,000 per year. It will require major maintenance in year 5, which costs $2,000. Alternatively, Machine B costs $57,000. This machine will last for only 6 years because of its higher technology and delicate design, and its salvage value is assumed to be $15,000. The annual maintenance and operating are expected to be $8,000 per year. Based on a present worth comparison, which machine should be used using an 8-year study period at an interest rate of 8% per year. And why? Note, assuming the book value as a reasonable estimate for the market value, the book value of machine A in year 8 is $36,000, while the book value of Machine B in year 2 is $43,000.

The Times newspaper is trying to decide between two machines. Machine A costs $80,000 and is expected to last 12 years, with a $14,000 salvage value. The annual maintenance and operating expenses are $4,000 per year. It will require major maintenance in year 5, which costs $2,000. Alternatively, Machine B costs $57,000. This machine will last for only 6 years because of its higher technology and delicate design, and its salvage value is assumed to be $15,000. The annual maintenance and operating are expected to be $8,000 per year. Based on a present worth comparison, which machine should be used using an 8-year study period at an interest rate of 8% per year. And why? Note, assuming the book value as a reasonable estimate for the market value, the book value of machine A in year 8 is $36,000, while the book value of Machine B in year 2 is $43,000.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 5P

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