You Have Been Asked to Evaluate Two Machines

question 15

Multiple Choice

You have been asked to evaluate two machines. The benefits from ownership are identical. Machine A costs $300 to buy and install, lasts for 5 years, and costs $160 per year to operate. Machine B costs $500, lasts for 7 years, and costs $120 per year to operate. Both machines have zero salvage value. Assuming that this is a one-time acquisition, which machine do you recommend if the cost of capital is 15%?

• A) Machine A, the PV is $163 more than Machine B.
• B) Machine A, the PV of its costs is $163 less than Machine B.
• C) Machine A, because the project length is two years less than Machine B.
• D) Machine B, the PV is $163 more than Machine A.
• E) Machine B, the PV of its costs is $163 less than Machine A.

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Definitions:

Activity Cost Pools

These are collections of all the costs related to a specific activity or process in activity-based costing.

Time-Driven

A term referring to models or systems that are based on the actual time taken to perform activities, often used in activity-based costing and scheduling.

Activity-Based Costing

An accounting method that assigns costs to products or services based on the activities they require, aiming to more accurately reflect the actual costs of production.

Customer Cost Analysis

A method for determining the total cost associated with acquiring and servicing a customer, including direct and indirect expenses.