A Small Manufacturer Is Considering Two Alternative Machines

question 26

Multiple Choice

A small manufacturer is considering two alternative machines. Machine A costs $1 million, has an expected life of 5 years, and generates after-tax cash flows of $350,000 per year. At the end of 5 years, the salvage value of the original machine is zero, but the company will be able to purchase another Machine A at a cost of $1.2 million. The second Machine A will generate after-tax cash flows of $375,000 a year for another 5 years at which time its salvage value will again be zero. Alternatively, the company can buy Machine B at a cost of $1.5 million today. Machine B will produce after-tax cash flows of $400,000 a year for ten years, and after ten years it will have an after-tax salvage value of $100,000. Assume that the cost of capital is 12 percent. If the company chooses the machine which adds the most value to the firm, by how much will the company's value increase?

• A) $347,802.00
• B) $451,775.21
• C) $633,481.19
• D) $792,286.54
• E) $811,357.66

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Definitions:

Americans

Citizens or nationals of the United States of America, often characterized by a diverse mix of cultural backgrounds and identities.

20th Century

The period from January 1, 1901, to December 31, 2000, marked by significant global events, technological advances, and cultural shifts.

Sociologists of Religion

Scholars who study the sociological aspects of religion, including its origins, practices, and impact on society.

Value

The importance, worth, or usefulness of something, often determined by its perceived benefit or desirability in a specific context.