You Are Considering the Purchase of One of Two Machines

question 64

Multiple Choice

You are considering the purchase of one of two machines required in your production process.Machine A has a life of two years.Machine A costs $50 initially and then $70 per year in maintenance.Machine B has an initial cost of $90.It requires $40 in maintenance for each year of its three-year life.Either machine must be replaced at the end of its life.Which is the better machine for the firm? The discount rate is 15% and the tax rate is zero.

• A)Machine A as EAC for machine A is $100.76
• B)Machine B as EAC for machine B is $79.42
• C)Machine A as PV of costs for machine A is $163.80
• D)Machine B as PV of costs for machine B is $181.33Machine A: Annuity factor = (1/.15)× (1 - (1/(1.15^2)))= 1.6257.Machine B: Annuity factor = (1/.15)(1 - (1/(1.15^3)))= 2.2832.Costs:PV(A)= 50 + 70 (1.6257)= 163.80; EAC = 163.80/(1.6257)= 100.76;

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Definitions:

Contingency Factor

An external condition or situation that affects the decision-making process or the effectiveness of a business strategy.

Financial Feasibility

An assessment of the viability of a project or business, focusing on its ability to generate sufficient financial returns.

Normative Decision Model

A framework that suggests leaders determine the best course of action based on normative rules and the involvement of team members.

Group Support

The assistance, encouragement, and resources provided by a collective to its members to achieve common goals or address individual needs.