Great Enterprises Is Analyzing Two Machines to Determine Which One

question 42

Multiple Choice

Great Enterprises is analyzing two machines to determine which one they should purchase. The company requires a 13% rate of return and uses straight-line depreciation to a zero book value. Machine A has a cost of $285,000, annual operating costs of $8,500, and a 3-year life. Machine B costs $210,000, has annual operating costs of $14,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Great Enterprises should select machine _____ because it will save the company about _____ a year in costs.

• A) A; $10,688
• B) A; $17,716
• C) B; $5,500
• D) B; $14,987
• E) B; $16,204

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Definitions:

Operating Condition

The current state and functioning status of a company's operational processes and resources.

Insurance

A contractual arrangement where an insurer agrees to compensate the insured for specified loss, damage, illness, or death in return for payment of a premium.

Freight Charges

Costs associated with transporting goods from one place to another.

Service Potential

Service potential refers to the capacity of an asset to provide goods or services that contribute to the future income of an organization.