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The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs
- The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs (expressed in real terms):
Year | Machine A | Machine B |
0 | $40,000 | $50,000 |
1 | 10,000 | 8,000 |
2 | 10,000 | 8,000 |
3 | 10,000+replace | 8,000 |
4 | 8,000+replace |
- Suppose you are Borstals financial manager. If you had to buy one or the other machine and rent it to the production manager for that machines economic life, what annual rental payment would you have to charge? Assume a 6 percent real discount rate and ignore taxes. What annual rental payment would I have to charge?
- Which machine should Borstal buy?
- Usually the rental payments you derived in part (a) are just hypothetical a way of calculating and interpreting equivalent annual cost. Suppose you actually do buy one of the machines and rent it to the production manager. How much would you actually have to charge in each future year if there is steady 8 percent per year inflation?
- Which machine should Borstal buy?
- Usually the rental payments you derived in part (a) are just hypothetical a way of calculating and interpreting equivalent annual cost. Suppose you actually do buy one of the machines and rent it to the production manager. How much would you actually have to charge in each future year if there is steady 8 percent per year inflation?
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