Mercil Corporation is going to buy one of the following two machines. Each machine meets the specifications

Question:

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?

Machine 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.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
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Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...