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 | $42,500 | $52,500 | ||
1 | 10,500 | 9,000 | ||
2 | 10,500 | 9,000 | ||
3 | 10,500 | + replace | 9,000 | |
4 | 9,000 | + replace | ||
These costs are expressed in real terms.
a. 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? Assume a 9% real discount
rate and ignore taxes. (Do not round intermediate
calculations. Enter your answers as a positive
value rounded to 2 decimal places.)
c. If there is steady 3% per year inflation, what
will be the annual rental payment for machine B for the second
year? (Enter your answer as a positive
value rounded to 2 decimal places.)
Get Answers For Free
Most questions answered within 1 hours.