Your company needs a machine for the next seven years, and you have two choices (assume an annual interest rate of 15%): Machine A costs $100,000 and has an annual operating cost of $47,000. Machine A has a useful life of seven years and a salvage value of $15,000 at the end of its life. Machine B costs $120,000 and has an annual operating cost of $15,000. Machine B has a useful life of three years and no salvage value. At the end of its life, it will need to be replaced with a new machine. Assume the new machine will share the exactly same cost. 1) Draw the cash flow diagram for the two options. 2) Make your decision based on the NPW calculation for the two machines. 3) Which machine will you pick if you use AE calculation instead? 4) Are the decisions resulted from NPW and AE consistent?
Your company needs a machine for the next seven years, and you have two choices (assume an annual interest rate of 15%): Machine A costs $100,000 and has an annual operating cost of $47,000. Machine A has a useful life of seven years and a salvage value of $15,000 at the end of its life. Machine B costs $120,000 and has an annual operating cost of $15,000. Machine B has a useful life of three years and no salvage value. At the end of its life, it will need to be replaced with a new machine. Assume the new machine will share the exactly same cost. 1) Draw the cash flow diagram for the two options. 2) Make your decision based on the NPW calculation for the two machines. 3) Which machine will you pick if you use AE calculation instead? 4) Are the decisions resulted from NPW and AE consistent?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Your company needs a machine for the next seven years, and you have two choices (assume an annual interest rate of
15%): Machine A costs $100,000 and has an annual operating cost of $47,000. Machine A has a useful life of seven
years and a salvage value of $15,000 at the end of its life. Machine B costs $120,000 and has an annual operating cost
of $15,000. Machine B has a useful life of three years and no salvage value. At the end of its life, it will need to be
replaced with a new machine. Assume the new machine will share the exactly same cost. 1) Draw the cash flow diagram
for the two options. 2) Make your decision based on the NPW calculation for the two machines. 3) Which machine will
you pick if you use AE calculation instead? 4) Are the decisions resulted from NPW and AE consistent?
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