Question
A firm is currently considering two widget machines. The first machine is highly automated and has an initial investment cost of $850,000, a salvage value
A firm is currently considering two widget machines. The first machine is highly automated and has an initial investment cost of $850,000, a salvage value equal to 30% of its initial investment cost at the end of ten years, and an operating cost of $120 per unit. The second machine is a low-tech machine automated and has an initial investment cost of $150,000 with no salvage value at the end of ten years and an operating cost of $145 per unit. Assuming a real cost of capital of 5% compounded annually, what is the range of annual demands that would result in the low-tech machine having a lower total cost than the highly automated machine?
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