A company is evaluating two new machines, and the one chosen will be replaced on
ID: 2677440 • Letter: A
Question
A company is evaluating two new machines, and the one chosen will be replaced on a perpetual basis (at the same cost and effects on OCF). Both machines will generate $10 million in annual sales, the tax rate for both is 35%, and the required return. Given the following detail on each machine, which one would you choose?Machine X costs $2,900,000, lasts 6 years, has variable costs of 35% of sales, and fixed costs of $130,000 per year.
Machine Y costs $5,100,000, lasts 9 years, has variable costs of 30% of sales, and fixed costs of $130,000 per year.
Explanation / Answer
machine X because fixed costs are same but initial cost for X is less and it turns out be profitable