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You are considering upgrading some manufacturing facilities by purchasing one of three different machines, each with the same production capacity. Machine A costs $35,000, has a life of 40 years, annual maintenance costs of $2000, and salvage value of $7500. Machine B costs $20,000, has a life of 20 years, annual maintenance of $2800, and salvage value of $3000. Machine C costs $12,000, has a life of 10 years, annual maintenance of $4000, and no salvage value.

a) Determine the most economical choice, based on minimizing the present value of total costs over a 40-year period. Use an annual discount rate of 6%. Assume that initial machine costs, annual maintenance, and discount rates are constant throughout the analysis period.

b) What is the Benefit/Cost ratio (as a percentage return on investment) for the reduced annual maintenance cost during the first ten years of operation versus the increased initial purchase cost of Machine A compared to Machine C? For Machine B compared to Machine C?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92311624

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