A small manufacturing firm is considering the purchase of a new machine to modernize one of its current production lines. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six years, respectively, but the firm does not expect to need the service of either machine for more than five years. The machines have the following expected receipts and disbursements: After four years of use, the salvage value for Machine B will be $1,000. The firm always has another option: to lease a machine at $3,000 per year, fully maintained by the leasing company. The lease payment will be made at the beginning of each year. (a) How many decision alternatives are there? (b) Which decision appears to be the best at i = 10%? Item Initial cost Service life Estimated salvage value Annual O&M costs Cost to change oil filter every other year Engine overhaul Machine A Machine B $8,500 $6,500 4 years 6 years $600 $1,000 $800 $520 $100 None $200 (every 3 years) $280 (every 4 years)

A small manufacturing firm is considering the purchase of a new machine to modernize one of its current production lines. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six years, respectively, but the firm does not expect to need the service of either machine for more than five years. The machines have the following expected receipts and disbursements: After four years of use, the salvage value for Machine B will be $1,000. The firm always has another option: to lease a machine at $3,000 per year, fully maintained by the leasing company. The lease payment will be made at the beginning of each year. (a) How many decision alternatives are there? (b) Which decision appears to be the best at i = 10%? Item Initial cost Service life Estimated salvage value Annual O&M costs Cost to change oil filter every other year Engine overhaul Machine A Machine B $8,500 $6,500 4 years 6 years $600 $1,000 $800 $520 $100 None $200 (every 3 years) $280 (every 4 years)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

A small manufacturing firm is considering the purchase of a new machine to modernize one of its current production
lines. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six
years, respectively, but the firm does not expect to need the service of either machine for more than five years. The
machines have the following expected receipts and disbursements: After four years of use, the salvage value for
Machine B will be $1,000. The firm always has another option: to lease a machine at $3,000 per year, fully maintained
by the leasing company. The lease payment will be made at the beginning of each year.
(a) How many decision alternatives are there?
(b) Which decision appears to be the best at i = 10%?
Item
Initial cost
Service life
Estimated salvage value
Annual O&M costs
Cost to change oil filter every other year
Engine overhaul
Machine A
Machine B
$8,500
$6,500
4 years
6 years
$600
$1,000
$800
$520
$100
None
$200 (every 3 years) $280 (every 4 years)
A

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