Question

In: Finance

Machines J and K have the following investment and operating costs: Year          0                     

Machines J and K have the following investment and operating costs:

Year          0                      1          2          3

J                 10000              1100    1200

K               12000              1100    1200    1300

Which machine is a better buy at a WACC of 10%?

Solutions

Expert Solution

J Year Cash flow × discount factor Present value
$        10,000 $    10,000.00
1 $          1,100          0.909091 $      1,000.00
2 $          1,200          0.826446 $          991.74
Total          1.735537 $    11,991.74
EAC - J 11991.74/ 1.735537 $      6,909.52
K Year Cash flow × discount factor Present value
$        12,000 $    12,000.00
1 $          1,100          0.909091 $      1,000.00
2 $          1,200          0.826446 $          991.74
3 $          1,300          0.751315 $          976.71
Total          2.486852 $    14,968.44
EAC - K 14968.44/ 2.486852 $      6,019.03

Machine K is better as its Equivalent annual cost is lower.


Related Solutions

Machines J and K have the following investment and operating costs: Year          0                     
Machines J and K have the following investment and operating costs: Year          0                      1          2          3 J                10000              1100    1200 K               12000              1100    1200    1300 Which machine is a better buy at a WACC of 10%?
Which of the following are not examples of operating costs for an IT investment? Multiple Choice...
Which of the following are not examples of operating costs for an IT investment? Multiple Choice Costs of routine hardware replacements over time Cost of contract for help desk support Costs of disposal of electronics at end of life Costs of software license renewals All of the choices are examples of operating costs.
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $61,000 per year; operating costs with the new machine are expected to be $41,000 per year. The new machine will cost $66,000 and will last for 6 years, at which time it can be sold for $4,500. The current machine will also last for 6 more years but will have zero salvage value. Its current disposal value is...
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $67,000 per year; operating costs with the new machine are expected to be $45,000 per year. The new machine will cost $74,000 and will last for 4 years, at which time it can be sold for $4,500. The current machine will also last for 4 more years but will have zero salvage value. Its current disposal value is...
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $68,000 per year; operating costs with the new machine are expected to be $42,000 per year. The new machine will cost $71,000 and will last for 5 years, at which time it can be sold for $4,000. The current machine will also last for 5 more years but will have zero salvage value. Its current disposal value is...
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $70,000 per year; operating costs with the new machine are expected to be $45,000 per year. The new machine will cost $66,000 and will last for 5 years, at which time it can be sold for $4,500. The current machine will also last for 5 more years but will have zero salvage value. Its current disposal value is...
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $70,000 per year; operating costs with the new machine are expected to be $45,000 per year. The new machine will cost $66,000 and will last for 5 years, at which time it can be sold for $4,500. The current machine will also last for 5 more years but will have zero salvage value. Its current disposal value is...
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $67,000 per year; operating costs with the new machine are expected to be $38,385 per year. The new machine will cost $154,000 and will last for five years, at which time it can be sold for $3,000. The current machine will also last for five more years but will not be worth anything at that time. It cost...
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $64,000 per year; operating costs with the new machine are expected to be $35,385 per year. The new machine will cost $154,000 and will last for five years, at which time it can be sold for $2,500. The current machine will also last for five more years but will not be worth anything at that time. It cost...
X Company is considering replacing one of its machines in order to save operating costs. Operating...
X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $64,000 per year; operating costs with the new machine are expected to be $35,385 per year. The new machine will cost $156,000 and will last for four years, at which time it can be sold for $1,000. The current machine will also last for four more years but will not be worth anything at that time. It cost...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT