A firm is trying to decide which of two machines to install to reduce excessive costs of repairs due less reliable old machines. The new machines cost $1000 and have useful lives of five years, and no salvage value. Machine A can be expected to result in $300 savings annually. Machine B will provide cost savings of $400 the first year, but will decline $50 annually, making the second-year savings $350, the third year savings $300, and so forth. With interest at 7%, which machine should be purchased based on benefit-cost ratio?

Question

Business

Demarcus Dudley

14 November, 01:09

A firm is trying to decide which of two machines to install to reduce excessive costs of repairs due less reliable old machines. The new machines cost $1000 and have useful lives of five years, and no salvage value. Machine A can be expected to result in $300 savings annually. Machine B will provide cost savings of $400 the first year, but will decline $50 annually, making the second-year savings $350, the third year savings $300, and so forth. With interest at 7%, which machine should be purchased based on benefit-cost ratio?

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Answers (1)

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Esperanza Moore · Answer 1

TMachine B will be the most benefical.

Explanation:

1,000 5 year savings for $300

1,000 5 year saving of 400 and decreasing 50 per year

interest rate 7%

TIR first machine: 15,2382%

TIR second machine: 17,4663%

The better option would be the second machine, because it produce a better yield and therefore it will have a better NPV when calculate a 7% rate