You Can Continue to Use Your Less Efficient Machine at a Cost

question 35

Multiple Choice

You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years.Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.At a cost of capital of 15 percent, you should:

• A)buy the new machine and save $600 in equivalent annual costs
• B)buy the new machine and save $388 in equivalent annual costs
• C)keep the old machine and save $388 in equivalent annual costs
• D)keep the old machine and save $580 in equivalent annual costs

---

Definitions:

C Rating

A rating given to a security indicating significant risk; it's one of the lower ratings in the grading scale of investments.

Catastrophe Bonds

Insurance-linked securities issued by insurance companies to transfer major risks from the issuer to investors, typically used for natural disaster risks.

Asset-Backed Bonds

Bonds that are secured by a pool of assets, such as loans or receivables, which generate the cash flow to pay bondholders.

TIPS

Treasury Inflation-Protected Securities, a type of U.S. Treasury bond designed to help investors protect against inflation.