Case in Finance XYZ Company XYZ Limited is a manufacturer of transmissions and axles used in the harvesting equipment of the agricultural industry. The manufacturing process is quite extensive, resulting in a vast amount of bulky steel scrap. The unprocessed steel scrap is sold as a by-product of the manufacturing operation to various firms involved in the recycling process. The executive committee is currently evaluating whether to process the scrap into different grades and types of usable steel. Using various models of chip crushers, the scrap can be ground and compressed into either rough or fine scrap. The fine scrap would fetch a higher market price than the rough scrap. XYZ Limited has to decide whether to invest in the higher-cost chip crusher (HCC) to produce fine scrap or the lower-cost chip crusher (LCC) to produce rough scrap. As a financial analyst of the company, you have gathered relevant purchase prices and operating costs of the two chip crushers from the supplier of the chip crushers and the marketing and production staff. The key estimates of financial data for the two machines are given below: Purchase Price Useful Life (years) Depreciation (reducing balance method) Salvage value at the end of useful life Annual interest expense Annual scrap revenue Annual operating costs: - Variable overheads - Salaries - Marketing LCC HCC $400,000 $480,000 4 40% p.a. 30% p.a. $80,000 $48,000 $48,000 $48,000 $450,000 $600,000 $50,000 $150,000 $80,000 $110,000 $45,000 $60,000