Question

Three alternative machine models are being considered for an ongoing operation. The three alternatives will be...

Three alternative machine models are being considered for an ongoing operation. The three alternatives will be used in the production of the same product. Therefore, the selection among the three will be based on total costs. Model A costs $105,000 and will last 4 years. Its real operating cost is $10,200/year. Model B costs $110,000 and will last 5 years. Its real operating cost is $9,400/year. Model C costs $125,000 and will last 6 years, Its real operating cost is $9,600/year. It is determined that the real opportunity cost of capital is 7%. Rank the three models from the best choice to the least choice. a. Best A, B, C Least b. Best C, B, A Least c. Best B, A, C Least d. Best A, C, B Least e. Best C, A, B Least

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

To calculate the total cost of the three alternatives , the annuity formula shall be used

Total cost of each alternative = Initial cost of machine + Present value of operating costs

Present value of operating cost will be calculated with the annuity formula

PV = , here r = 7% or 0.07 ( cost of capital)

1. Model A

Initial cost of machine = $105,000

Present Value (PV) of operating costs = 10,200 [ 1 - (1+0.07)^ (-4) / 0.07]

total cost = $105,000 + $34,549.55 = $139,549.55

1. Model b

Initial cost of machine = $110,000

Present Value (PV) of operating costs = 9400 [ 1 - (1+0.07)^ (-5) / 0.07]

total cost = $110,000 + $38,541.86 = $148,541.86

1. Model c

Initial cost of machine = $125,000

Present Value (PV) of operating costs = 9600 [ 1 - (1+0.07)^(-6) / 0.07]

total cost = $125,000 + $45,758.78 = $170,757.78

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A company is considering two investment alternatives. Alternative A is a new machine that costs $50,000...
A company is considering two investment alternatives. Alternative A is a new machine that costs $50,000 and will last for ten years with no salvage value. It will save the company $5859 per year and the savings will increase by $2080 each year. Alternative B is a is a machine that will cost $75,000 and last 10 years. The salvage value at the end of 10 years is $25,000. It will save $11681 per year. Find the present worth of...
4. Two alternatives are being considered by a food processor for the warehousing and distribution of...
4. Two alternatives are being considered by a food processor for the warehousing and distribution of its canned products in a sales region. These canned products come in standard cartons of 24 cans per carton. The two alternatives are: Alternative A – Distribute the product themselves. The administrative costs are estimated at $43,000 per year, and other general operating expenses are calculated at $.0009 per carton. A warehouse will have to be purchased, which costs $300,000. Alternative B – Sign...
Rapier Fencing requires $750,000 in financing for a 60‐day period. Three alternatives are being considered. a....
Rapier Fencing requires $750,000 in financing for a 60‐day period. Three alternatives are being considered. a. Establish a line of credit with the bank at an interest rate of 6 percent payable on a discounted basis. b. Forgo trade discounts from suppliers on terms of 1.5/10, net 70. c. Issue commercial paper for 60 days sold at a discounted price of 98.8 percent of maturity value. a. What would be the rate of interest for bank loan? (Use 365 days...
Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain...
Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other.​ Gateway's discount rate is 11.0%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown​ below, which should it​ choose? ​ (Note: dollar amounts are thousands.) Model Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Old Reliable...
Using Net Benefit to Evaluate Risk Response Alternatives Cooper Movie Studio Corp. makes movies and is...
Using Net Benefit to Evaluate Risk Response Alternatives Cooper Movie Studio Corp. makes movies and is interested in lowering its operating costs for the following year, while maintaining the high quality and appeal of its movies. Cooper’s management is concerned about the additional costs the company would have to incur if new industry regulation is passed by Congress. The chart at the top of the next page contains a description of this top risk, an inherent risk assessment, three risk...
Given the following three alternatives, the equation for capitalized cost (CW) of alternative F at i=10%...
Given the following three alternatives, the equation for capitalized cost (CW) of alternative F at i=10% is: Alternative E F G First Cost, $ -50,000 -300,000 -900,000 AOC, $ per year -30,000 -10,000 -3,000 Salvage value, $ 5,000 70,000 200,000 Life, years 2 4 ∞ Group of answer choices A.) CW(F) =( -300,000(A/P,10%,4) – 10,000 + 70,000(P/F,10%,4) )/0.1 B.) CW(F) =( -300,000(P/A,10%,4) – 10,000 + 70,000(P/F,10%,4) )/0.1 C.) CW(F) =( -300,000(A/P,10%,4) – 10,000 + 70,000(A/F,10%,4) )(0.1) D.) CW(F) =( -300,000(A/P,10%,4)...
Replacement Analysis BTCF Machine A was purchased three years ago for $12,000 and had an estimated...
Replacement Analysis BTCF Machine A was purchased three years ago for $12,000 and had an estimated market value of $1,000 at the end of its 10-year life. Annual operating costs are $1,500. The machine will perform satisfactorily for the next seven years. A salesman for another company is offering machine B for $60,000 with a market value of $5,000 after 10 years. Annual operating costs will be $800. Machine A could be sold now for $8,000, and the MARR is...
Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative...
Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following​ table: LOADING.... The​ firm's cost of capital is 12​% Machine A Machine B Machine C Initial investment 85100 60000 129800 Year Cash Flows 1 18300 12500 49500 2 18300 13900 30200 3 18300 15800 20500 4 18300 17900 20500 5 18300 19800 19600 6 18300 25500 30000...
Replacement Analysis BTCF Machine A was purchased three years ago for $12,000 and had an estimated...
Replacement Analysis BTCF Machine A was purchased three years ago for $12,000 and had an estimated market value of $1,000 at the end of its 10-year life. Annual operating costs are $1,500. The machine will perform satisfactorily for the next seven years. A salesman for another company is offering machine B for $60,000 with a market value of $5,000 after 10 years. Annual operating costs will be $800. Machine A could be sold now for $8,000, and the MARR is...
Atlas Company is investigating three approaches to production. Approach A entails buying a $25,000 machine that...
Atlas Company is investigating three approaches to production. Approach A entails buying a $25,000 machine that will last 7 years and will have no salvage value at the end of those 7 years. Annual production costs for Approach A are estimated at $0.20/unit. Approach B entails buying a $35,000 machine that will have a salvage value of $2,000 at the end of its 7-year lifetime and incurring annual production costs of $0.15/unit. Approach C involves purchasing a machine for $30,000...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT