You Are Considering the Purchase of One of Two Machines

question 17

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 $3,500 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 percent 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:

Cost of Goods Sold

Expenses directly incurred from the production of a company's sold goods, involving the cost of labor and materials.

General and Administrative Costs

Expenses related to the day-to-day operations of a business that are not directly linked to production or sales.

Gross Profit Margin

A financial metric indicating the percentage of revenue that exceeds the cost of goods sold; it measures how efficiently a company uses its labor and supplies in production.

Cost of Goods Sold

Refers to the immediate expenses related to manufacturing products that a business sells.