You are looking to replace an old machine X with a new machine Y.
The two machines, X and Y, which perform the same functions, have the following costs and lives.
PV Costs Life
Machine X $10,000 5
Machine Y $11,500 7
Which machine would you choose? Assume an opportunity cost of capital of 15%.

Question

Quizplus · Accepted Answer

To determine which machine is the better investment, we need to calculate the present value (PV) of each machine's costs and compare them. We will use the formula: PV = Cost / (1+r)^n, where r is the discount rate (opportunity cost of capital) and n is the number of years in the machine’s life.

For machine X: 
PV = $10,000 / (1+0.15)^5
PV = $5,219.87

For machine Y: 
PV = $11,500 / (1+0.15)^7
PV = $4,028.09

Based on these calculations, buying machine Y would be the better investment, as its PV costs are lower than machine X. Therefore, the answer is B: Buy the new machine Y.

You Are Looking to Replace an Old Machine X with a New