A Company Buys a Machine and Then Buys an Upgrade

question 9

Multiple Choice

A company buys a machine and then buys an upgrade which increases its productivity by 100%.The total cost of the machine and the upgrade is $10,000.The upgraded machine has no scrap value at the end of its 10-year estimated lifetime and maintenance is $500 per year.If there was no upgrade,the maintenance would be only $300 per year and the machine's lifetime would be 14 years (scrap value would still be $0) .If the upgraded and non-upgraded machines are economically equivalent and if the cost of capital is j₁ = 10%,how much less is the cost of the original (non-upgraded) machine?

• A)$4374
• B)$4700
• C)$5626
• D)$5937

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Definitions:

Spending Variance

The difference between the actual amount of money spent and the budgeted amount in a given period.

Occupancy Costs

Expenses related to occupying a space, including rent, utilities, and other facility-related costs.

Spending Variance

The difference between the actual spending and the budgeted or planned spending in a given period.

Revenue Variance

The difference between the actual revenue earned and the expected revenue according to budget.