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

question 108

Multiple Choice

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

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Definitions:

Capital Asset Pricing Model

A framework detailing how expected returns on assets, especially stocks, correlate with systematic risk.

Accounting Beta

A measure of the sensitivity of a firm's earnings before interest and taxes to changes in the market as a whole.

Pure Play Method

A valuation method focusing on companies specializing in a single line of business to estimate investment risks and returns.

Scenario Analysis

A method used in finance to analyze the different possible outcomes of a decision given varying sets of assumptions.