You Are Considering the Purchase of One of Two Machines

question 31

Multiple Choice

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in maintenance costs. Machine B costs $25,000 initially, has a life of three years, and requires $3500 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 14% and the tax rate is zero.

• A) Machine A
• B) Machine B
• C) Both Machines A and B
• D) Neither Machine A nor B

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Definitions:

Financial Assets

Assets such as stocks, bonds, bank deposits, or any other instrument that derives value because of a contractual right or ownership claim.

Future Cash Flows

The estimated amount of money to be received or paid out over a specified future period by an investment or business operation.

Stockbroker

A professional who buys and sells stocks and other securities on behalf of clients in exchange for a fee or commission.

Securities

Financial instruments that represent an ownership position in a publicly traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.