6) Plum plc wishes to replace its existing pressing machine with a new model immediately. The new model would be replaced by the same model. Three new models are available as follows: Model                                                  I                       II                     III Purchase price                        £50,000                  £40,000            £70,000 Estimated life                                 5 years             4 years            6 years Annual running costs (Payable at the end of each year)          £4,000.       £6,000           £3,500 Plum plc has a cost of capital of 10% per annum. Which new model should Plum plc choose, and what replacement policy should it follow if it wishes to minimise the present value of its costs? A) Purchase model I and replace every five years B) Purchase model II and replace every four years C) Purchase model III and replace every six years

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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6) Plum plc wishes to replace its existing pressing machine with a new model immediately. The new model would be replaced by the same model. Three new models are available as follows:

Model                                                  I                       II                     III

Purchase price                        £50,000                  £40,000            £70,000

Estimated life                                 5 years             4 years            6 years

Annual running costs

(Payable at the end of each year)          £4,000.       £6,000           £3,500

Plum plc has a cost of capital of 10% per annum. Which new model should Plum plc choose, and what replacement policy should it follow if it wishes to minimise the present value of its costs?

A) Purchase model I and replace every five years

B) Purchase model II and replace every four years

C) Purchase model III and replace every six years

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