Problem:
DeCento's is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $276,000, annual operating costs of $18,000, and a 3-year life. Machine B costs $220,000, has annual operating costs of $22,000, and a 2-year life. The firm currently pays no taxes.
Required:
Which machine should be purchased and why?
- Machine A; because it will save the company about $18,600 a year
- Machine A; because it will save the company about $19,261 a year
- Machine B; because it will save the company about $21,202 a year
- Machine B; because it will save the company about $19,315 a year
- Machine B; because it will save the company about $18,667 a year
Note: Show all workings.