Bruno\'s, Inc. is analyzing two machines to determine which one it should purcha
ID: 2641773 • Letter: B
Question
Bruno's, Inc. is analyzing two machines to determine which one it should purchase. The company
requires a 14% rate of return and uses straight-line depreciation to a zero book value. Machine A has
a cost of $290,000, annual operating costs of $8,000, and a 3-year life. Machine B costs $180,000,
has annual operating costs of $12,000, and has a 2-year life. Whichever machine is purchased will be
replaced at the end of its useful life. Which machine should Bruno's purchase and why? (Round your
answer to whole dollars.)
A. Machine A; because it will save the company about $8,600 a year
B. Machine A; because it will save the company about $132,912 a year
C. Machine B; because it will save the company about $200,000 a year
D. Machine B; because it will save the company about $11,600 a year
E. Machine B; because its equivalent annual cost is $199,759
The correct answer is D, Please show me the steps.
Explanation / Answer
Machine B is the answer
There has to be a tax rate mentioned in question that will have saving effecct on the net cash outflow and hence will give $11,600 per year as result
Machine A Year Cost Annual operating Cost Replacement Cost Total Cost Present value Factor Present Value 0 $290,000 1 $290,000 1 $8,000 - 8,000 0.877192982 $7,018 2 $8,000 - 8,000 0.769467528 $6,156 3 $8,000 - 8,000 0.674971516 $5,400 4 $290,000 0.592080277 $171,703 Machine B Net Cash Outflow $480,276 Year Cost Annual operating Cost Replacement Cost Total Cost Present value Factor Present Value 0 $180,000 1 $180,000 1 $12,000 - 12,000 0.877192982 $10,526 2 $12,000 - 12,000 0.769467528 $9,234 3 $180,000 0 0 - 0.769467528 $138,504 4 $12,000 12,000 0.592080277 $7,105 $345,369 Differential in Cash Outflow $134,907 Annual 33,727Related Questions
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