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24 April, 19:58

A firm is trying to decide which of two machines to install to reduce excessive costs of repairs due less reliable old machines. The new machines cost $1000 and have useful lives of five years, and no salvage value. Machine A can be expected to result in $300 savings annually. Machine B will provide cost savings of $400 the first year, but will decline $50 annually, making the second-year savings $350, the third year savings $300, and so forth. With interest at 7%, which machine should be purchased based on benefit-cost ratio?

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  1. 24 April, 20:05
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    TMachine B will be the most benefical.

    Explanation:

    1,000 5 year savings for $300

    1,000 5 year saving of 400 and decreasing 50 per year

    interest rate 7%

    TIR first machine: 15,2382%

    TIR second machine: 17,4663%

    The better option would be the second machine, because it produce a better yield and therefore it will have a better NPV when calculate a 7% rate
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