DeCento's Is Analyzing Two Machines to Determine Which One It

question 80

Multiple Choice

DeCento's is analyzing two machines to determine which one it should purchase.Whichever machine is purchased will be replaced at the end of its useful life.The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine.Machine A has a cost of $276,000,annual operating costs of $18,000,and a 3-year life.Machine B costs $220,000,has annual operating costs of $22,000,and a 2-year life.The firm currently pays no taxes.Which machine should be purchased and why?

• A)Machine A;because it will save the company about $18,600 a year
• B)Machine A;because it will save the company about $19,261 a year
• C)Machine B;because it will save the company about $21,202 a year
• D)Machine B;because it will save the company about $19,315 a year
• E)Machine B;because it will save the company about $18,667 a year

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Definitions:

Reaction Curve

A graphical representation in economics that shows how one player’s optimal strategy choice depends on the strategy choice of another player.

Cournot Model

An economic model used to describe an industry structure in which companies compete on the quantity of output they will produce, assuming that their competitor's decisions are fixed.

Stackelberg Model

An economic model of strategic interaction in oligopolistic markets where one firm (the leader) sets its output first and then other firms (followers) set their outputs sequentially.

West's National Reporter System

A comprehensive set of law books that publishes the decisions of state and federal courts in the United States.