A small manufacturing firm is considering the purchase of a new machine. Two types of machines are available on the market. The lives of Machine A and Machine B are four years and six years respectively, but the firm does not expect to need the service of either for more than five years. The machines have the following expected receipts and disbursements:
Item Machine A Machine B
Initial cost $6500 $8500
Service Life 4 years 6 years
Estimated salvage value $600 at the end of 4 years $900 at the end of 6 years
Annual O & M costs $800 $520
After five years of use, the salvage value for Machine B will be $1000. The firm always has another option: to lease a machine at $3000 per year, fully maintained by the leasing company. The lease payment will be made at the beginning of each year.
(a) How many decision alternatives are there?
(b) Which decision is the best, at MARR = 10%, compounded annually, based on the data given?