Question
Sarah has earned good returns on her bond and stock investments and now thinking of starting a bottle cap business. She is considering two different
Sarah has earned good returns on her bond and stock investments and now thinking of starting a bottle cap business. She is considering two different capping machines that will perform equally well but that have different expected lives. The more expensive one costs 30,000 AED to buy, requires a payment of 3,000 AED per year for maintenance and operation expenses, and will last for five years. The cheaper model costs only 22,000 AED, requires operating and maintenance costs of 4,000 AED per year, and lasts for only three years. Regardless of which machine she selects, she intends to replace it at the end of its life with an identical machine with identical costs and operating performance characteristics. Because there is not a market for used cappers, there will be no salvage value associated with either machine. Assume that the discount rate on both of these machines is 8%, which machine should she buy for her business?
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