Question 2 ElectroMotion Corp is an electric vehicle manufacturer that produces fuel-cell powered passenger cars and...

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Question 2 ElectroMotion Corp is an electric vehicle manufacturer that produces fuel-cell powered passenger cars and trucks. The company has developed a new production line machine that has considerably improved the efficiency of the firm's existing manufacturing process. The cost of buying the new machine is £20,000 irrespective from when you buy it, and its economic useful life is 3 years. The existing production line machine will last at most 2 more years. The annual operating costs of the two machines are given below. Old machine New machine Annual operating cost (£) Year 2 15,000 6,000 Year 1 10,000 4,000 The opportunity cost of capital is 10%. Year 3 N/A 8,000 a) When should the company replace the existing machine with a new one? [20 marks] b) Interpret your result in question (a). [5 marks] See Next Page Question 2 ElectroMotion Corp is an electric vehicle manufacturer that produces fuel-cell powered passenger cars and trucks. The company has developed a new production line machine that has considerably improved the efficiency of the firm's existing manufacturing process. The cost of buying the new machine is £20,000 irrespective from when you buy it, and its economic useful life is 3 years. The existing production line machine will last at most 2 more years. The annual operating costs of the two machines are given below. Old machine New machine Annual operating cost (£) Year 2 15,000 6,000 Year 1 10,000 4,000 The opportunity cost of capital is 10%. Year 3 N/A 8,000 a) When should the company replace the existing machine with a new one? [20 marks] b) Interpret your result in question (a). [5 marks] See Next Page

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a The company should replace the existing machine with a new one i... View the full answer