RELO Manufacturing has a machine replacement decision. RELO will buy one of two machines, which will be
Question:
RELO Manufacturing has a machine replacement decision. RELO will buy one of two machines, which will be replaced at the end of its life. Both machines cost $1,800. Machine A has a 4-year life, a salvage value of $800, and expenses of $525 per year and will be depreciated down to $800. Machine B has a 5-year life, a salvage value of $300, and expenses of $500 per year. Machine B will be depreciated down to a book value of $300. Assume conditions of straight-line depreciation to the salvage value, a tax rate of 35%, and a discount rate of 18%. Which machine should RELO choose and why?
Machine A because it has a lower present value of total costs
Machine B because it has a lower present value of total costs
Machine A because it has a lower EAC
Machine B because it has a lower EAC
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim