Need help with this problem please: Your company needs a machine for the next se
ID: 1151898 • Letter: N
Question
Need help with this problem please:
Your company needs a machine for the next seven years, and you have two choices (assume an annual interest rate of 7%). Machine A costs $120,000 and has an annual operating cost of $45,000. Machine A has a useful life of seven years and a salvage value of $17,000 Machine B costs $180,000 and has an annual operating cost of $29,000. Machine B has a useful life of five years and no salvage value. However, the life of Machine B can be extended by two years with a certain amount of investment. If Machine B's life is extended, it will still cost $29,000 annually to operate and still have no salvage value What would you pay at the end of year 5 to extend the life of Machine B by two years? Click the icon to view the interest factors for discrete compounding when 7% per year. You should pay S(Round to the nearest dollar.)Explanation / Answer
Present worth for optionA =($120000)+$45000)(1-(1/1.07)^7)/0.07+17000/1.07^7=$120000+$45000*5.39-17000/1.07^7=$351,963
Present worth for option B if life is extended for 2 years after 5 year s
=180000+29000*5.39+X/1.07^6+X/1.07^7=336310+X/1.07^6+X/1.07^7
Then to find maximum invrwstment to be made we need an equally here
336310+A=351963
A=15653
X+X(1.07)=15653(1.07)^7
X=12142.66
Hence investment to be done atmost $12142.66 to ber indifferent between A and B