Question
In: Finance
Precision Tool is analyzing two machines to determine which one it should purchase. The company requires...
- Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $892,000, annual operating costs of $28,200, and a 4-year life. Machine B costs $1,118,000, has annual operating costs of $19,500, and has a 5-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should be purchased? Show all work.
Solutions
Expert Solution
We use the LCM method for comparison.This translates to 20 years
Accordingly the cash flows are
| Year | Machine A | Machine B |
| 0 | -892000 | -1118000 |
| 1 | -28200 | -19500 |
| 2 | -28200 | -19500 |
| 3 | -28200 | -19500 |
| 4 | -920200 | -19500 |
| 5 | -28200 | -1137500 |
| 6 | -28200 | -19500 |
| 7 | -28200 | -19500 |
| 8 | -920200 | -19500 |
| 9 | -28200 | -19500 |
| 10 | -28200 | -1137500 |
| 11 | -28200 | -19500 |
| 12 | -920200 | -19500 |
| 13 | -28200 | -19500 |
| 14 | -28200 | -19500 |
| 15 | -28200 | -1137500 |
| 16 | -920200 | -19500 |
| 17 | -28200 | -19500 |
| 18 | -28200 | -19500 |
| 19 | -28200 | -19500 |
| 20 | -28200 | -19500 |
Depreciation has been ignored since there is no tax rate.
NPV of each machine is
| NPV A | -2132157.98 |
| NPV B | -2209649.09 |
Hence machine A should be preferred since it has lower costs and higher NPV
WORKINGS
jeff jeffy answered 1 year agoRelated Solutions
Bruno's is analyzing two machines to determine which one it should purchase. The company requires a...
Bruno's is analyzing two machines to determine which one it
should purchase. The company requires a rate of return of 14%.
Machine A has a cost of $290,000, annual operating costs of $8,000,
and a 3-year life. Machine B costs $180,000, has annual operating
costs of $12,000, and has a 2-year life. Whichever machine is
purchased will be replaced at the end of its useful life. Which
machine should Bruno's purchase and why?
Bruno's is analyzing two machines to determine which one it should purchase. The company requires a...
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...
Dylan and Co. is analyzing two machines to determine which one it should purchase. The company...
Dylan and Co. is analyzing two machines to determine which one
it should purchase. The company requires a 14% rate of return, has
a 40% marginal tax rate, and uses straight-line depreciation to a
zero book value, which is the expected salvage value after their
lives. Machine A has a cost of $310,000, annual operating costs of
$20,000, and a 4-year life. Machine B costs $210,000, has annual
operating costs of $60,000, and has a 3-year life. Whichever
machine is...
Franklin Company is analyzing two machines to determine which one it should purchase. Whichever machine is...
Franklin Company is analyzing two machines to determine which
one it should purchase. Whichever machine is purchased will be
replaced at the end of its useful life. The company requires a 12
percent rate of return and uses straight-line depreciation to a
zero book value over the life of the machine. Machine A has a cost
of $372,000, annual operating costs of $31,600, and a 4-year life.
Machine B costs $268,000, has annual operating costs of $39,200,
and a 3-year...
Franklin Company is analyzing two machines to determine which one it should purchase. Whichever machine is...
Franklin Company is analyzing two machines to determine which
one it should purchase. Whichever machine is purchased will be
replaced at the end of its useful life. The company requires a 12
percent rate of return and uses straight-line depreciation to a
zero book value over the life of the machine. Machine A has a cost
of $372,000, annual operating costs of $31,600, and a 4-year life.
Machine B costs $268,000, has annual operating costs of $39,200,
and a 3-year...
Lindner Corp. is comparing two machines to determine which one it should purchase. The company requires...
Lindner Corp. is comparing two machines to determine which one
it should purchase. The company requires a rate of return of 14
percent and uses straight-line depreciation to a zero book value
over the life of its equipment. Machine X has a cost of $352,000,
annual cash outflows of $31,700, and a four-year life. Machine Y
costs $554,000, has annual cash outflows of $13,000, and has a
five-year life. Whichever machine is purchased will be replaced at
the end of...
Brooks, Inc. is analyzing two machines to determine which one it should purchase. Whichever machine is...
Brooks, Inc. is analyzing two machines to determine which one it
should purchase. Whichever machine is purchased will be replaced at
the end of its useful life. The company requires a 12 percent rate
of return and uses straight-line depreciation to a zero book value
over the life of the machine. Machine A has a cost of $485,000,
annual operating costs of $28,500, and a 3-year life. Machine B
costs $300,000, has annual operating costs of $45,400, and a 2-year...
Burlington is analyzing two machines to determine which one it should purchase. Whichever machine is purchased...
Burlington is analyzing two machines to determine which one it
should purchase. Whichever machine is
purchased will be replaced at the end of its useful life. The
company requires a 13 percent rate of return and
uses straight-line depreciation to a zero book value over the
life of the machine. Machine A has a cost of
$405,000, annual operating costs of $25,000, and a 3-year life.
Machine B costs $324,000, has annual
operating costs of $28,000, and a 2-year life....
Fishnet is analyzing two machines to determine which one it should purchase. Whichever machine is purchased...
Fishnet is analyzing two machines to determine which one it
should purchase. Whichever machine is purchased will be replaced at
the end of its useful life. The company requires a 13 percent rate
of return and uses straight-line depreciation to a zero book value
over the life of the machine. Machine A has a cost of $405,000,
annual operating costs of $25,000, and a 3-year life. Machine B
costs $313,000, has annual operating costs of $28,000, and a 2-year
life....
Fishnet is analyzing two machines to determine which one it should purchase. Whichever machine is purchased...
Fishnet is analyzing two machines to determine which one it
should purchase. Whichever machine is purchased will be replaced at
the end of its useful life. The company requires a 13 percent rate
of return and uses straight-line depreciation to a zero book value
over the life of the machine. Machine A has a cost of $405,000,
annual operating costs of $25,000, and a 3-year life. Machine B
costs $313,000, has annual operating costs of $28,000, and a 2-year
life....
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 4. Why did the United States and the Soviet Union find themselves in a “Cold War”...
- The Facts: Ann and Bill decided to start a coffee shop. They agreed Bill would provide...
- MARGI sells different types of wine. Customers place orders to the most popular “Summer Wine” at...
- A firm's bonds have a maturity of 8 years with a $1,000 face value, have an...
- Naive reasoning suggests that a string theory vacuum with cosmological constant Lambda1 is always unstable as...
- I. Design and code a class Rectangle that has the following properties: Two private members double...
- A bond has a $1,000 par value, 10 years to maturity, and an 8% annual coupon...
ADVERTISEMENT