The Borough Company is to replace its existing machinery. It has a choice between two new types of machine having different lives. The machines have the following costs:

Machine X ceases to operate and is worth nothing after three years. Machine Y ceases to operate and is worth nothing after four years.
Each machine will be replaced at the end of its life by identical machines with identical costs. This cycle will continue indefinitely. The cost of capital is 13 per cent.
Which machine should Borough buy?

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Points in time (yearly intervals) Machine X Machine Y Initial investment Operating costs Operating costs £20,000 £5,000 E5,000 65,000 £25,000 £4,000 £4,000 $4,000 £4,000 0 3 Operating costs Operating costs