You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $50,000 to purchase and which will have OCF of -$3,500 annually throughout the machine's expected life of three years; and machine B, which will cost $75,000 to purchase and which will have OCF of -$4,900 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 14 percent, which one should you choose?

Question

Quizplus · Accepted Answer

We need to calculate the present value of the OCFs for each machine to determine the least expensive option.

For Machine A: 
PV = (-$3,500) / (1 + 0.14)^1 + (-$3,500) / (1 + 0.14)^2 + (-$3,500) / (1 + 0.14)^3
PV = -$10,103.28

For Machine B:
PV = (-$4,900) / (1 + 0.14)^1 + (-$4,900) / (1 + 0.14)^2 + (-$4,900) / (1 + 0.14)^3 + (-$4,900) / (1 + 0.14)^4
PV = -$13,778.80

Therefore, Machine A has a lower present value of OCFs and is the least expensive option. Therefore, the company should choose Machine A.

You Are Trying to Pick the Least-Expensive Machine for Your