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Please show the working out, so I understand the concept. Thank you. A company has been awarded a 10 year fixed price contract of $6,500
Please show the working out, so I understand the concept. Thank you.
A company has been awarded a 10 year fixed price contract of $6,500 per annum to machine components for a manufacturer, They are considering the purchase of a suitable machine to carry out the work. Machine A will cost $10,000 and the total operating and maintenance costs are estimated at $1,500 per annum at current prices. Machine B will cost $16,000 and the total operating and maintenance costs are estimated at $900 per annum at current prices. For either machine at the end of the 10 year period they will be obsolete with negligible scrap value. The company's cost of capital is 10% p.a. The inflation rate is expected to be 3.5% p. a. (i) Which machine should the company buy? (ii) What would be the expected present value of the net profit earned by the contractStep by Step Solution
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