Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. Equivalent annuity Widget Master Inc. is considering the purchase of a new machine for the production of widgets. Machine Widget XS costs $260 000
3. Equivalent annuity Widget Master Inc. is considering the purchase of a new machine for the production of widgets. Machine Widget XS costs $260 000 and has three-year life. The annual cash operating costs (excluding depreciation) are $64 000 per year. Alternative machine Widget XL costs $450 000, has a five year life with the annual cash operating costs of $35 000 per year. For both machines, straight-line depreciation is used. The resulting book value will be zero for both machines but the salvage value is around 10% of the purchase price (eg. this is the estimated market value). The tax rate is 34% and the cost of capital is 10%. Evaluate the after-tax cash flows for both alternatives and find the best alternative by considering equivalent annuities (more precisely equivalent annual cost, EAC)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started