Question
Machine A which is a basic model costs $125,000 and lasts 5 years. At the end of the 5 years it has a salvage value
Machine A which is a basic model costs $125,000 and lasts 5 years. At the end of the 5 years it has a salvage value of $10,500 and its market value at the end of 3 years is $77,000. An enhanced model, Machine B sells for $176,000 and has a life of 8 years with a salvage value of $28,500. The benefit that these two machines are anticipated to provide is a constant $29,500 per year. Ignore inflation for costs and benefits. Looking at an 8-year window with a rate of 8% APR compounded yearly, what is the difference between the net present worth of Machine B over Machine A? (Hint: the second copy of Machine A can be sold at the end of the 8th year for the price that it will command after a 3-year life.)
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