(Cash-flow analysis) The ZZZ Company is considering investing in a new machine for one of its factories. The company can choose either Machine A or Machine B. The life span of each machine is 5 years, and depreciation is straight-line to zero salvage value. The widgets produced by the machines are sold for $6 each. The company has a cost of capital of 12%, and its tax rate is 35%.

a. If the company manufactures 1,000,000 units per year, which machine should it buy?

b. Plot a graph showing the profitability of investment in each machine type depending on the annual production.

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A B C 1 ZZZ WIDGET MACHINE 2 Cost of capital 12% 3 Tax rate 35% 4 Widget sales price/unit 6.00 5 Machine A Machine B 6 Cost 7 Annual fixed cost 8 Variable cost per widget 9 Life span (years) 10 Annual depreciation 4,000,000 10,000,000 300,000 210,000 1.20 0.80 5 5 800,000 2,000,000