Question

Bruno's is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14.6 percent and uses straight-line depreciation to a zero book value over a machine's life. Ignore bonus depreciation and taxes. Machine A has a cost of $318,000, annual operating costs of $8,700, and a life of 3 years. Machine B costs $247,000, has annual operating costs of $9,300, and a life of 2 years. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why?

Machine A; because it will save the company about $13,406 a year

Machine A; because it will save the company about $18,100 a year

Machine B; because it will save the company about $16,510 a year

Machine B; because it will save the company about $11,609 a year

Machine B; because it will save the company about $13,406 a year

Answer 1

Equate Annual COst = PV of Cash Outflow / PVAF (r%, n)

Machine A:

Year	CF	PVF @14.6%	Disc CF
0	$ 3,18,000.00	1.0000	$ 3,18,000.00
1	$      8,700.00	0.8726	$      7,591.62
2	$      8,700.00	0.7614	$      6,624.45
3	$      8,700.00	0.6644	$      5,780.50
PV of Cash Outflow			$3,37,996.58
PVAF(14.6%,3)			2.2985
PV of Cash Outflow			$1,47,053.69

Machine B:

Year	CF	PVF @14.6%	Disc CF
0	$ 2,47,000.00	1.0000	$ 2,47,000.00
1	$      9,300.00	0.8726	$      8,115.18
2	$      9,300.00	0.7614	$      7,081.31
PV of Cash Outflow			$2,62,196.49
PVAF(14.6%,2)			1.6340
PV of Cash Outflow			$1,60,459.86

Machine A is selected as it is having Lesser cost by $ 13,406.17 ( 160,459.86 - 147,053.69 )

Option A is selected.