Question

1. A firm requires a new stamping press for its ongoing operations. There are two models it could purchase: the A1000 and the B1000. The annual costs of operating these machines are shown in the table below. Note that although the machines have different initial required investments and different lives, each will produce the same output per year. Which of the two machines should the firm purchase?

Cash outflows per year in thousands
Machine	Time 0	Year 1	Year 2	Year 3	Year 4
A1000	500	120	120	120
B1000	600	100	100	100	100

Answer 1

There are two MAchines and you need to choose 1 which is btter in terms of costing. Only costs are given so choose which is having low cost. Required rate of return is not given so PV concept can not be used. And time period is different so cant compare simply the total cost , we need to calculate Average Annual cost which is as

Average annual cost of A1000 = Total cost / no. of years

= 286.67

And for B1000

=

= 250

SO it is clear Machine B1000 is better due to less cost.