Consider a Machine That Costs $20 000,has an Estimated Useful

question 37

Multiple Choice

Consider a machine that costs $20 000,has an estimated useful life of five years with cash flows of $10 000 p.a.and a cost of capital of 10% p.a.A company is considering whether the machine should be replaced every one,two,three,four or five years.The net present value (assuming constant chain of replacement) under each alternative is given as follows:
NPV(1) = $20 000
NPV(2) = $29 000
NPV(3) = $35 000
NPV(4) = $25 000
NPV(5) = $19 000
What is the appropriate action for the firm?

• A)Go ahead with the project.
• B)Do not go ahead with the project.
• C)Go ahead with the project and replace the machine every five years.
• D)Go ahead with the project and replace the machine every three years.

---

Definitions:

Angle of Repose

The steepest angle at which a sloping surface formed of a particular loose material is stable.

Slope Failure

The sudden or gradual collapse of a slope that is too steep for its material to resist the pull of gravity.

Calcium Carbonate

Calcium carbonate is a chemical compound, CaCO3, found in rocks as the minerals calcite and aragonite and is the main component of shells of marine organisms, snails, and eggs.

Clay Minerals

A group of hydrous aluminium phyllosilicates, sometimes with variable amounts of iron, magnesium, alkali metals, alkaline earths, and other cations, which are found in soils and sedimentary rocks.