You can continue to use your less efficient machine at a cost of $8,000 annually for the next 5 years. Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance. At a cost of capital of 15%, you should:
A) buy the new machine and save $600 in equivalent annual costs.
B) buy the new machine and save $388 in equivalent annual costs.
C) keep the old machine and save $388 in equivalent annual costs.
D)keep the old machine and save $580 in equivalent annual costs.

Question

Quizplus · Accepted Answer

NPV = -$12,000 - $5,000[(1/0.15) - 1/0.15(1.15)⁵] = -$28,760.78Using a financial calculator:N = 5; I = 15%; PV = -$28,760.78; FV = 0; CPT PMT = $8,579.79Change in annual cost = $8,579.79 - 8,000 = $579.79

You Can Continue to Use Your Less Efficient Machine at a Cost