The Latham Co. Ltd, which has an annual sales turnover of £1 million, is considering buying a new machine at a cost of £5000. It is expected that the machine would reduce production costs by £ 1000 during each year of its useful life at the end of which the machine would have no scrap value.

The company can obtain finance at a cost of 8%.

(a) Assuming the expected life of the machine is seven years would you advise the company to purchase?

(b) What would your advice be if after a survey of 200 similar machines you discover that the years of useful life varied thus:

Years oJusefullife Number of machines 2 10 5 10 6

7 8

9 60 50 50 20

(e) If the machine had cost £500,000 and the annual cost reduction £ 100,000 would this affect your advice in

(a) or (b l.

(d) If there was no statistical evidence of the likely useful life of the machine but from your experience you would have expected the life pattern to be the same as in (b), would this have affected your decision?