Question -
Tim Smunt has been asked to evaluate two machines. After some investigation, he determines that they have the costs shown in the following table. He is told to assume that:
1. The life of each machine is 3 years.
2. The company thinks it knows how to make 12% on investments no more risky than this one.
3. Labor and maintenance are paid at the end of the year.
|
|
Machine A
|
Machine B
|
|
Original cost
|
$10,000
|
$20,000
|
|
Labor per year
|
2,000
|
4,000
|
|
Maintenance per year
|
4,000
|
1,000
|
|
Salvage value
|
2,000
|
7,000
|
Determine, via the present value method, which machine Tim should recommend.