A company can rent a machine for an all-inclusive rate of $125 per hour and onaverage makes use of such a machine for1600 hours per year. The company isconsidering purchasing a machine as analternative to rent and obtains theinformation given below:Cost of machine = $320,000Salvage value after 5 years = $120,000Annual insurance premiums = $3,000Annual tax = $1,80Fuel cost per hour = $50Oil and grease cost = 10% of fuel costAnnual maintenance = $15,000Discount Rate = 18%If the planning horizon is 5 years, determinewhether the company should purchase a newmachine or continue to rent?

In this we have to calculate total annual cost of machine and see whether it is feasible or not.

Ivage value after 5 years = $120,000 nnual insurance premiums = $3,000 nual tax = $1,800 el cost per hour = $50 l and grease cost = 10% of fuel cost nual maintenance = $15,000 scount Rate = 18% the planning horizon is 5 years, determine hether the company should purchase a new achine or continue to rent?

Ivage value after 5 years = $120,000 nnual insurance premiums = $3,000 nual tax = $1,800 el cost per hour = $50 l and grease cost = 10% of fuel cost nual maintenance = $15,000 scount Rate = 18% the planning horizon is 5 years, determine hether the company should purchase a new achine or continue to rent?

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

Section: Chapter Questions

Problem 1PS

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Question

A company can rent a machine for an all-
inclusive rate of $125 per hour and on
average makes use of such a machine for
1600 hours per year. The company is
considering purchasing a machine as an
alternative to rent and obtains the
information given below:
Cost of machine = $320,000
Salvage value after 5 years = $120,000
Annual insurance premiums = $3,000
Annual tax = $1,80
Fuel cost per hour = $50
Oil and grease cost = 10% of fuel cost
Annual maintenance = $15,000
Discount Rate = 18%
If the planning horizon is 5 years, determine
whether the company should purchase a new
machine or continue to rent?

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