Answer to Question #105469 in Finance for ray

Question #105469
The owner of D. Donuts Ltd. wants to buy a new machine for his bakery. He is looking at two possible machines, Machine A and Machine B. On the one hand, Machine A will initially cost $ 100, its operating cost will be $ 10 per year and is expected to last 2 years. On the other hand, Machine B will cost $ 140 with an operating cost of $ 8 per year, and will run out after 3 years. Both machines will be amortized at an ACC rate of 25%. If the ERR is 10% and the tax rate is 42%, which machine should the owner buy?
1
Expert's answer
2020-03-18T10:02:28-0400


1) By car A

Calculate cash flow by year

Total cash flow: 

Calculate the discounted cash flow:

Total discounted cash flow:

2)By car B

Calculate cash flow by year

Total cash flow: 

Calculate the discounted cash flow:

Total discounted cash flow: 

NPVb more NPVa, owner buys car b


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