You Are Trying to Pick the Least-Expensive Machine for Your

question 60

Multiple Choice

You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $100,000 to purchase and which will have OCF of −$7,000 annually throughout the machine's expected life of three years; and machine B, which will cost $125,000 to purchase and which will have OCF of −$2,600 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 15 percent, using EAC which one should you choose?

• A) Machine A
• B) Machine B
• C) All of these choices are correct.
• D) Neither machine A nor B

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Definitions:

Purchase Order

An official document issued by a buyer committing to pay the seller for the sale of specific products or services.

Fair-value Hedge

A hedge of the exposure to changes in the fair value of an asset or liability or an unidentified firm commitment that could affect profit or loss.

Drilling Machine

A tool used for making holes in various materials, part of machinery equipment.

Forward Contract

A financial agreement between two parties to buy or sell an asset at a predetermined future date and price.