Reference: 10-13
Jimbob Co Jimbob Co Uses a 10% Discount Rate and the Incremental Cost

question 17

Multiple Choice

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.
-In comparing these two alternatives, which is the correct evaluation

• A)Machine B should be purchased as the net present value of the costs of this alternative is the highest.
• B)Machine B should be purchased as the net present value of the costs of this alternative is the lowest.
• C)Machine A should be purchased as the net present value of the costs of this alternative is the lowest.
• D)Machine A should be purchased as the net present value of the costs of this alternative is the highest.

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