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?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
None
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?
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?
Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education