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.

---

Definitions:

Cost Diseconomies

Situations where costs per unit increase as a firm's operation scales up, often due to inefficiencies or increased complexity.

Celebrity Endorsement

The practice of using a famous person's support or approval to promote a product or service, leveraging their influence to reach potential customers.

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded by consumers at various price levels.

Equilibrium Price

The market price at which the quantity demanded of a product equals the quantity supplied, leading to a stable market condition.