Mercil Corporation is going to buy one of the following two machines. Each machine meets the specifications for a particular task in the company. Mercil's tax rate is 30 percent and its cost of capital is 15 percent.
Which machine should Mercil buy and why?
LO3Machine A: Costs $90,000 to acquire and $12,000 cash a year to operate in each year of its 10-year life. Annual depreciation is $9,000, and the machine has no salvage value.Machine B: Costs $50,000 to acquire and $24,600 a year to operate in each year of its 10-year life. Annual depreciation is $5,000, and the machine has no salvage value.