JADO Mfgis Trying to Decide Which One of Two Machines to to Purchase.Machine

question 7

Multiple Choice

JADO Mfg.is trying to decide which one of two machines to purchase.Machine A costs $398,000,has a 5-year life and requires $113,000 in pretax annual operating costs.Machine B costs $510,000,has a 4-year life and requires $67,000 in pretax annual operating costs.Either machine will be depreciated using the straight-line method to zero over its life.Neither machine will have any salvage value.Whichever machine is selected,it will never be replaced.The discount rate is 12 percent and the tax rate is 34 percent.Which machine should be purchased and why?

• A)Machine A because its NPV is about $61,927 higher than Machine B's NPV
• B)Machine A because its EAC is about $38,319 higher than Machine B's EAC
• C)Machine A because its EAC is about $89.989 lower than Machine B's EAC
• D)Machine B because its NPV is about $56,642 higher than Machine A's NPV
• E)Machine B because its NPV is about $45,880 higher than Machine A's NPV

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Definitions:

Marginal Revenue

The additional income generated from the sale of one more unit of a product or service.

Marginal Cost

A rephrased definition: The expense incurred in the manufacture or production of an additional quantity of a product or service.

Price Discrimination

A pricing strategy where a company charges different prices to different groups of customers for the same product or service, based on factors other than production costs.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service and the actual amount they receive in the market.