Machine 1 has a capitalized cost of $74,000.Machine 2 has a cost of $C,a scrap value estimated at $5000,an estimated lifetime of 10 years and annual maintenance costs of $2000.Machine 2 produces 20% more output per year than Machine 1.If j₁ = 8%,what is the value of C so that machine 1 and 2 are economically equivalent? (Answer to the nearest dollar)

Question

Quizplus · Accepted Answer

The correct answer is A because Machine 1 and Machine 2 are economically equivalent when their annual costs are equal. The annual cost of Machine 1 is $74,000 * 0.08 = $5,920. The annual cost of Machine 2 is $C * 0.08 + $2,000 + ($C - $5,000) / 10 = $0.08C + $2,000 + $0.1C - $500 = $0.18C + $1,500. Setting these two annual costs equal to each other, we get $0.18C + $1,500 = $5,920, which gives us $C = $36,564.

Machine 1 Has a Capitalized Cost of $74,000