1.

Consider a factory that produces light bulbs. The factory has an old piece of equipment, and the factory owner is considering replacing the old equipment with a new machine. The owner is considering two options, with the following details:

	Machine A	Machine B
Cost to purchase the machine	$50,000.00	$20,000.00
Variable cost per light bulb	$0.16	$0.30
Fixed cost per year	$100,000.00	$30,000.00
Life span (years)	10	10
Number of light bulbs will sell per year	500,000	500,000

• The factory sells each light bulb for $0.42, and the discount rate is 12% and the corporate tax rate is 25%. The purchase of the machine occurs at year 0 and subsequent cash flows occur from years 1 through 10. Assume straight-line depreciation to zero for both machines. Assume no investment in net working capital. There is no salvage value.
• The factory needs only one new machine. Which machine should the factory owner buy (using concepts from class)?
• Additionally, construct a two-way data table to show how the decision variable (i.e., the variable used to assess which machine to purchase) changes for different discount rates and different light bult sales price per unit. Do this analysis only for the preferred machine.