Will rate, thank you.

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:

Year	Machine A		Machine B
0	$46,000		$56,000
1	11,200		10,400
2	11,200		10,400
3	11,200	+ replace	10,400
4			10,400	+ replace

These costs are expressed in real terms. Suppose that technological change is expected to reduce costs by 10% per year. There will be new machines in year 1 that cost 10% less to buy and operate than A and B. In year 2 there will be a second crop of new machines incorporating a further 10% reduction, and so on.

Suppose you are Borstals financial manager. If you had to buy one or the other machine and rent it out to the production manager for that machines economic life, what annual rental payment would you have to charge at the end of the first year and how would this alter in subsequent years given the expected technological changes? Assume a 8% real discount rate and ignore taxes. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.)

	Machine A
Year 1 rent	$
Year 2 rent	$
Year 3 rent	$

	Machine B
Year 1 rent	$
Year 2 rent	$
Year 3 rent	$
Year 4 rent	$

Part 2:

The presidents executive jet is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $39,000 a year and would save $100,000 a year in airline bills. On the other hand, you believe that with the increased use the company will need to replace the jet at the end of three years rather than four. A new jet costs $1.29 million and (at its current low rate of use) has a life of seven years. Assume that the company does not pay taxes. All cash flows are forecasted in real terms. The real opportunity cost of capital is 6%.

a. Calculate the equivalent annual cost of a new jet. (Do not round intermediate calculations. Enter your answer as a negative value rounded to 2 decimal places.)

Equivalent annual cost $

b. Calculate the present value of the additional cost of replacing the jet one year earlier than under its current usage.(Do not round intermediate calculations. Enter your answer as a negative value rounded to 2 decimal places.)

Present value $

c. Calculate the present value of the savings. (Do not round intermediate calculations. Enter your answer as a positive value rounded to 2 decimal places.)

Present value $

d. Should you try to persuade the president to allow other officers to use the plane?

	No
	Yes