You Are Trying to Pick the Least-Expensive Machine for Your

question 106

Multiple Choice

You are trying to pick the least-expensive machine for your company.You have two choices: machine A,which will cost $100,000 to purchase and which will have OCF of −$7,000 annually throughout the machine's expected life of three years; and machine B,which will cost $125,000 to purchase and which will have OCF of −$2,600 annually throughout that machine's four-year life.Both machines will be worthless at the end of their life.If you intend to replace whichever type of machine you choose with the same thing when its life runs out,again and again out into the foreseeable future,and if your business has a cost of capital of 15 percent,which one should you choose?

• A) Machine A
• B) Machine B
• C) Both machines A and B
• D) Neither machine A nor B

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Definitions:

Warranty of Merchantability

A guarantee that a product will meet reasonable expectations of quality and performance.

Writing

A type of documentation that shows contractual intent and satisfies the statute of frauds requirement.

States Require

A phrase indicating that individual U.S. states may have specific legal requirements or regulations that must be followed.

Merchantability

A warranty implied by law that goods sold are fit for the ordinary purpose for which such goods are used.