Question

QUESTION 8

1. For th below two machines and based on CC analysis which machine we should select?

   	Machine A	Machine B
   First cost, $	22,294	117,224
   Annual cost, $/year	14,745	7,540
   Salvage value, $	5,001	-
   Life, years	3	infinite

   Answer the below question:

   B- the CC for machine B=

Answer 1

Assuming discount rate, i = 10%

Convert machine A's cash flows into A and then divide by i

A1 = -22,294(A/P, 10%, 3) - 14,745 + 5001(A/F, 10%, 3)

A1 = -22,294*0.4021 - 14,745 + 5001*0.3021

A1 = -8964.42 - 14745 + 1510.80

A1 = $-22,198.60

CC1 = A1/i = $-22,198.60 / 10% = $-221,986

Capitalized Cost for Machine B is:

CC2 = -117,224 - 7540/10% = $-192,624

Comparing the Capitalized Costs of the two alternatives, Machine B has lesser cost and hence should be chosen.