Answer to Question #72502 in Finance for jones

Question #72502
A firm is considering employing one of the two machines A and B over a period of 4 years at the end of which the salvage value of each is zero. The cost of machine A is $10, 000 while that of machine B is $11, 000. The probability distributions of the returns for each machine are given in the table below. PROBABILTY MACHINE A($) MACHINE B($) 0.25 6000 7000 0.50 5000 5000 0.25 4000 3000 The risk free discount rate is 10% while the risk premium applied as follows. STANDARD DEVIATION($) RISK PREMIUM 0 – 999 0% 1000 – 1999 10% 2000 – 2999 10% 3000 – 3999 20% Which of the two machines should be installed?
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Expert's answer
2018-01-16T09:20:07-0500
Machine A($) = (0.25 * 6000 + 0.5 * 5000+ 0.25 * 4000)/1.1^4 = 3415.07
Machine B($) = (0.25 * 7000 + 0.5 * 5000 + 0.25 * 3000)/1.1^4 = 3415.07
We get same results for both Machines, that`s why we can be installed or first Machine A, or Machine B.

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