Question

In: Finance

You can choose between Machine A or B. Your annual interest rate is 9%. You need...

You can choose between Machine A or B. Your annual interest rate is 9%. You need a Machine for 6 years (required service period).

Machine A costs $42,000 and lasts for 2 years. It has no salvage value, and costs an additional $15,000 each year to operate.

Machine B costs $90,500 and lasts for 3 years. It has a salvage value of $20,000 and costs $8,000/year to operate.

What is the Annual Cost of the lowest cost machine?

Solutions

Expert Solution

Machine A Machine B
Annual Costs $ -38,875.69 $-31,592.30
Thus, Annual Cost of Lowest cost Machine that is Machine B is $ -31,592.30
Working;
Machine A:
Year Cost of Machine Annual Operating Costs Cash flow Discount factor Present Value
0 -42000 -42000                            1.0000 $     -42,000.00
1 -15000 -15000                            0.9174 $     -13,761.47
2 -42000 -15000 -57000                            0.8417 $     -47,975.76
3 -15000 -15000                            0.7722 $     -11,582.75
4 -42000 -15000 -57000                            0.7084 $     -40,380.24
5 -15000 -15000                            0.6499 $       -9,748.97
6 -15000 -15000                            0.5963 $       -8,944.01
                           4.4859 $ -1,74,393.20
(Sum of Year 1 to 6)
Annual Cost of Machine A = $            -1,74,393.20 /      4.4859
= $ -38,875.69
Machine B:
Year Cost of Machine Annual Operating Costs Cash flow Discount factor Present Value
0 -42000 -42000                            1.0000 $     -42,000.00
1 -15000 -15000                            0.9174 $     -13,761.47
2 -15000 -15000                            0.8417 $     -12,625.20
3 -42000 -15000 -57000                            0.7722 $     -44,014.46
4 -15000 -15000                            0.7084 $     -10,626.38
5 -15000 -15000                            0.6499 $       -9,748.97
6 -15000 -15000                            0.5963 $       -8,944.01
                           4.4859 $ -1,41,720.49
(Sum of Year 1 to 6)
Annual Cost of Machine A = $            -1,41,720.49 /      4.4859
= $ -31,592.30

Related Solutions

6. (Basic time period) If you can earn interest at an annual interest rate of 9%,...
6. (Basic time period) If you can earn interest at an annual interest rate of 9%, how long will it take for $25,000 to grow to be: Using Excel a. $30,000? b. $40,000? c. $75,000? d. $100,000?
how do you choose between a low interest rate and a rebate
how do you choose between a low interest rate and a rebate
HAAS Machine Tool Company offers you an SL-20 Machine for $60,000 at an annual interest rate...
HAAS Machine Tool Company offers you an SL-20 Machine for $60,000 at an annual interest rate of 12% for 7 Years. If you accept this deal and your company makes (7) end of year payments in the amount of the Annual Cost of the Machine (A) to HAAS, what is the total amount of interest paid to HAAS over the 7 years of making the payments?
At a growth rate (annual interest rate) of 9%; how long (years) it would take a...
At a growth rate (annual interest rate) of 9%; how long (years) it would take a sum to triple? Select the period that is closest to the correct answer.   
4. What annual interest rate would you need to earn if you wanted a $200 per...
4. What annual interest rate would you need to earn if you wanted a $200 per month contribution to grow to $14,700 in five years? 5. You wish to buy a $20,000 car. The dealer offers you a 5-year loan with an 8 percent APR. What are the monthly payments? 6. Joey realizes that he has charged too much on his credit card and has racked up $3,000 in debt. If he can pay $150 each month and the card...
Your bank offers to lend you $114,400 at an 8.5% annual interest rate to start your...
Your bank offers to lend you $114,400 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2? a. $10,428.81 b. $8,615.10 c. $9,068.53 d. $7,254.82 e. $8,161.67
A bond that offers an annual coupon rate of 9%, with interest paid annually, has a...
A bond that offers an annual coupon rate of 9%, with interest paid annually, has a face value of $1,000. The difference between its yield to maturity and coupon rate is 4%. The bond matures in 8 years. What is the bond’s price?
The treasurer of a corporation is trying to choose between FRA and Interest Rate Futures to...
The treasurer of a corporation is trying to choose between FRA and Interest Rate Futures to hedge interest rate risk. Explain these financial instruments, and discuss the advantages and disadvantages of each.
The current interest rate is 12%. Which job should you choose to maximize your earnings?
You must select between two alternative summer jobs:Job A will pay you $2000 at the beginning of June, but you have to work for eight weeks.Job B will pay you $400 at the beginning of June and $205 each week for the next eight weeks. In all other respects, the jobs are comparable – either one will do.The current interest rate is 12%. Which job should you choose to maximize your earnings?A) Job A B) Job BThe answer was marked...
Your credit card has a balance of ?$3100 and an annual interest rate of 18?%. You...
Your credit card has a balance of ?$3100 and an annual interest rate of 18?%. You decide to pay off the balance over two years. If there are no further purchases charged to the? card, you must pay ?$154.76 each month? , and you will pay a total interest of ?$614.24. Assume you decide to pay off the balance over one year rather than two. How much more must you pay each month and how much less will you pay...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT