A company buys a machine that costs $50,000.It has an estimated useful lifetime of 10 years with no scrap value.It produces 5000 units of output per period.Annual maintenance costs are $2000.The cost of capital is j₁ = 10%.The capitalized cost is $101,372.70.What is the maximum amount the company should spend on increasing the machine's production by 60%? (If done so,there will be no change to the estimated lifetime or the annual maintenance costs;Answer to the nearest dollar)

Question

Quizplus · Accepted Answer

The maximum amount the company should spend on increasing the machine's production by 60% can be calculated using the following formula:

Maximum Spend = Capitalized Cost * (1 - (1+i)^-n) * (1+i)^n * (1+g) / (1+g - 1)

where i is the discount rate, n is the number of periods (years), and g is the growth rate.

Plugging in the given values, we get:

Maximum Spend = $101,372.70 * (1 - (1+0.1)^-10) * (1+0.1)^10 * (1+0.6) / (0.6)

Maximum Spend = $37,373. Therefore, the best choice is C. Spending any more than this would not be financially viable for the company.

A Company Buys a Machine That Costs $50,000