XYZ Manufacturing Company is thinking of buying a widget assembly machine. It wo
ID: 1094141 • Letter: X
Question
XYZ Manufacturing Company is thinking of buying a widget assembly machine. It would cost $500,000 and last for five years with annual operating and maintenance cost of $10,000. It has a warranty for the first two years included in the initial cost. The extended warranty will be purchased at $5,000 for year three, $7,000 for year four, and $9,000 for year five. If the company expects the machine could bring $250,000 annual revenue, is it a good decision to buy this machine? Assume interest rate is 12% per year, compounded annually.
Explanation / Answer
Total revenue = 250000*5 = 1250000
total cost = 500000 + 500000*5*0.12 + 10000 * 5 + 5000 + 7000 + 9000 = 871000
since total revenue is more than the total cost its a good decision to buy the machine.
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