Question

The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs:   

Year	Machine A		Machine B
0	$47,000		$57,000
1	11,400		10,800
2	11,400		10,800
3	11,400	+ replace	10,800
4			10,800	+ replace

These costs are expressed in real terms. Suppose that technological change is expected to reduce costs by 10% per year. There will be new machines in year 1 that cost 10% less to buy and operate than A and B. In year 2, there will be a second crop of new machines incorporating a further 10% reduction, and so on.

Suppose you are Borstal’s financial manager. If you had to buy one or the other machine and rent it to the production manager for that machine’s economic life, what annual rental payment would you have to charge at the end of the first year and how would this alter in subsequent years given the expected technological changes? Assume a 10% real discount rate and ignore taxes. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.)

Machine A

Year 1 rent:?

Year 2 rent:?

Year 3 rent:?

Machine B

Year 1 rent:?

Year 2 rent:?

Year 3 rent:?

Year 4 rent:?

Answer 1