Bison MfgIs Considering Two Options for Purchasing Comparable Machinery

question 16

Essay

Bison Mfg.is considering two options for purchasing comparable machinery.Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years.Machine 2 will cost $25,000 with maintenance being an add-on charge.The estimated cost of maintenance is $1,000 the first year,$3,000 the second year,and $4,000 the third year and the fourth year.Assume the purchase cost is paid up front,but that maintenance is paid for at the end of each year.Interest is at 10%.Ignore income taxes and residual values.
Required: Determine which machine should be chosen based on present value considerations.

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Definitions:

Certainty Effect

The tendency for people to give greater weight to outcomes that are certain, compared to outcomes that are probable, often observed in decision-making under uncertainty.

Definite Outcomes

A term used to describe results or consequences that are clear, predictable, and unambiguous.

Probabilities

The measure of the likelihood that an event will occur, expressed as a number between 0 and 1.

Decision Making

The process of making choices by identifying a decision, gathering information, and assessing alternative resolutions.