A company must decide whether to buy Machine A or Machine B. After 5 years, Machine A will be...

Question:

A company must decide whether to buy Machine A or Machine B. After {eq}5 {/eq} years, Machine A will be replaced with another A. The initial cost for Machine A is {eq}\$12,500 {/eq}, annual maintenance is {eq}\$1,000 {/eq}, and the salvage value at 5 years is {eq}\$10,000 {/eq}. Machine B has an initial cost of {eq}\$20,000 {/eq}, {eq}0 {/eq} maintenance costs, and a salvage value of {eq}\$10,000 {/eq} at {eq}10 {/eq} years. Which machine should be purchased? Use a MARR of {eq}10\% {/eq}. Why?

Purchase cost of an asset

The total cost of an asset is equal to the sum of all expenses which are incurred till the asset is in state of its use, which may include cost of asset, transportation cost, installation expenses etc. It is the amount used while computing depreciation expense.

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1) Machine A

Calculation of present value of all cash flows

Present value of initial cost = $12,500 x 1 = $12,500

Present value of annual...

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Depreciation: Definition, Formula & Examples

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Chapter 5 / Lesson 14
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Learn about different methods of depreciation and depreciation expense, including: straight-line and declining methods, as well as the difference between physical depreciation and economic depreciation.


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