Item Machine A Machine B Initial cost $6,500 $8,500 Service life 4 years 6 уears Estimated salvage value $600 $1,000 Annual O&M costs $800 $520 Cost to change oil filter every other year Engine overhaul $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%?
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