Question
Company A is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine
Company A is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $66,500. Its operating costs are $22,200 a year, but in five years the machine will require a $18,900 overhaul. Thereafter operating costs will be $31,100 until the machine is finally sold in year 10 for $6,650.The older machine could be sold today for $26,100. If it is kept, it will need an immediate $25,500 overhaul. Thereafter operating costs will be $34,000 a year until the machine is finally sold in year 5 for $6,650. Both machines are fully depreciated for tax purposes. The company pays tax at 35%. Cash flows have been forecasted in real terms. The real cost of capital is 15%.What isthe equivalent annual costs for selling the new machine?
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