A Firm Is Evaluating Two Machines

question 5

Multiple Choice

A firm is evaluating two machines.Both machines meet the firm's quality standard.Machine A costs $40,000 initially and $1,000 per year to maintain.Machine B costs $24,000 initially and $2,000 per year to maintain.Machine A has a 6-year useful life and machine B has a 3-year useful life.Both machines have zero salvage value.Assume the firm will continue to replace worn-out machines with similar machines,and the discount rate is 7%.Which machine should the firm purchase?

• A) Machine A
• B) Machine B
• C) The firm is indifferent to the two machines
• D) Can't tell from the given information

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Definitions:

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