You are trying to decide between four machines for your firm. These machines only differ in their lifespan, initial cost, and annual maintenance costs... they are identical in every other way. This investment is vital to the operations of your firm, so you will need one of these machines in order to stay in business; that means, when the machine quits working, you will need to immediately reinvest in the same machine. You are looking for the cheapest machine. And you will reinvest in the same machine as switching between machines would create switching costs that would be significant. 2. Annual costs each Initial cost today Machine Lifespan year $2.5 milliona $50 milliona 5 years 8 years 4 years 10 years AC $57 milliona $47 million $75 milliona $3.5 million Cа $2.0 million $2.0million The cost of capital for the new machine is 10%. Use the same common end-year approach to rank the machines in order from best to worst. (Using Excel will help with this.) a. b. Use the equivalent annual annuity approach to Tank the machines in order from best to worst.
You are trying to decide between four machines for your firm. These machines only differ in their lifespan, initial cost, and annual maintenance costs... they are identical in every other way. This investment is vital to the operations of your firm, so you will need one of these machines in order to stay in business; that means, when the machine quits working, you will need to immediately reinvest in the same machine. You are looking for the cheapest machine. And you will reinvest in the same machine as switching between machines would create switching costs that would be significant. 2. Annual costs each Initial cost today Machine Lifespan year $2.5 milliona $50 milliona 5 years 8 years 4 years 10 years AC $57 milliona $47 million $75 milliona $3.5 million Cа $2.0 million $2.0million The cost of capital for the new machine is 10%. Use the same common end-year approach to rank the machines in order from best to worst. (Using Excel will help with this.) a. b. Use the equivalent annual annuity approach to Tank the machines in order from best to worst.
Chapter3: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 3TP: As a manager, you have to choose between two options for new production equipment. Machine A will...
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Transcribed Image Text:You are trying to decide between four machines for your firm. These machines only differ
in their lifespan, initial cost, and annual maintenance costs... they are identical in every
other way. This investment is vital to the operations of your firm, so you will need one of
these machines in order to stay in business; that means, when the machine quits working,
you will need to immediately reinvest in the same machine. You are looking for the
cheapest machine. And you will reinvest in the same machine as switching between
machines would create switching costs that would be significant.
2.
Annual costs each
Initial cost today
Machine
Lifespan
year
$2.5 milliona
$50 milliona
5 years
8 years
4 years
10 years
AC
$57 milliona
$47 million
$75 milliona
$3.5 million
Cа
$2.0 million
$2.0million
The cost of capital for the new machine is 10%.
Use the same common end-year approach to rank the machines in order from best to
worst. (Using Excel will help with this.)
a.
b.
Use the equivalent annual annuity approach to Tank the machines in order from best to
worst.
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