■Machine A –Initial Cost = $150,000 –Pre-tax operating cost = $65,000 Expected life is 8 years...

■Machine A

–Initial Cost = $150,000

–Pre-tax operating cost = $65,000

Expected life is 8 years

■Machine B

–Initial Cost = $100,000

–Pre-tax operating cost = $57,500

–Expected life is 6 years

The machine chosen will be replaced indefinitely and neither machine will have a differential impact on revenue. No change in NWC is required.

The required return is 10%, the applicable CCA rate is 20% and the tax rate is 40%.

Which machine should you buy?

Solutions

Expert Solution

Calculation for Machine A

	0	1	2	3	4	5	6	7	8
initial cost	150000	0	0	0	0	0	0	0	0
Depreciation		30000	24000	19200	15360	12288	9830.4	7864.32	6291.46
Pre tax operating cost		65000	65000	65000	65000	65000	65000	65000	65000
Post tax operating cost		39000	39000	39000	39000	39000	39000	39000	39000
Residual value									30828.1
Total CF	-150000	-39000	-39000	-39000	-39000	-39000	-39000	-39000	-8171.87
PV	-150000	-35455	-32231	-29301	-26638	-24216	-22015	-20013	-3812.24
Total CF	-343681

Machine B

	0	1	2	3	4	5	6
initial cost	100000	0	0	0	0	0	0
Depreciation		20000	16000	12800	10240	8192	6553.6
Pre tax operating cost		57500	57500	57500	57500	57500	57500
Post tax operating cost		34500	34500	34500	34500	34500	34500
Residual value							26214.4
Total CF	-100000	-34500	-34500	-34500	-34500	-34500	-8285.6
PV	-150000	-31363.6	-28512.4	-25920.4	-23564	-21421.8	-4677.01
Total CF	-285459

So, Machine A is should be purchased. As yearly expenses is 42K but in Machine B is 47K.

jeff jeffy answered 2 hours ago

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