Miles, Inc

question 28

Multiple Choice

Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $105,000. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the reduction in downtime must be worth

• A) $23,958 per year.
• B) $49,662 per year.
• C) $18,264 per year.
• D) $36,147 per year.

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Definitions:

Marginal Social Cost

The total cost to society of producing an additional unit of a good or service, including both private costs and externalities.

Society

A large group of individuals who live in the same area, share a common culture, norms, and values, and are organized in a cooperative manner.

Negative Production Externality

A situation in which the production of goods or services imposes costs on third parties not involved in the transaction, often not reflected in market prices.

Benefits To Consumers

The advantages or improvements in welfare, service, or product quality experienced by consumers.