Machine A was purchased 5 years ago for $90,000. Its operating cost is higher than expected, so it will be used for only 4 more years. Its operating cost this year will be $40,000, increasing by $2000 per year through the end of its useful life. The challenger, machine B, will cost $150,000 with a $50,000 salvage value after its 10-year ESL. Its operating cost is expected to be $10,000 for year 1, increasing by $500 per year thereafter. What is the market value for machine A that would make the two machines equally attractive at an interest rate of 12% per year. Solve by hand and spreadsheet. (Hint: Be sure you check the RV value carefully.)
Machine A was purchased 5 years ago for $90,000. Its operating cost is higher than expected, so it will be used for only 4 more years. Its operating cost this year will be $40,000, increasing by $2000 per year through the end of its useful life. The challenger, machine B, will cost $150,000 with a $50,000 salvage value after its 10-year ESL. Its operating cost is expected to be $10,000 for year 1, increasing by $500 per year thereafter. What is the market value for machine A that would make the two machines equally attractive at an interest rate of 12% per year. Solve by hand and spreadsheet. (Hint: Be sure you check the RV value carefully.)
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
Machine A was purchased 5 years ago for
$90,000. Its operating cost is higher than expected,
so it will be used for only 4 more years.
Its operating cost this year will be $40,000, increasing
by $2000 per year through the end of
its useful life. The challenger, machine B, will
cost $150,000 with a $50,000 salvage value after
its 10-year ESL. Its operating cost is expected to
be $10,000 for year 1, increasing by $500 per
year thereafter. What is the market value for machine
A that would make the two machines
equally attractive at an interest rate of 12% per
year. Solve by hand and spreadsheet. (Hint: Be
sure you check the RV value carefully.)
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