A company is considering buying a certain machine.There are there options:
• Machine 1 costs $6000 and will last 15 years with a scrap value of $800 and maintenance costs of $500 a year
• The capitalized cost for Machine 2 is $23,457
• The capitalized cost for Machine 3 is $25,500
It is known that machine 1 produces 30% less output than machine 2 and machine 3 produces 10% more output than machine 2.If j₁ = 7%,which of the following list is the rank of preference of machine to be purchased (ranked from best to worst machine) ?

Question

Quizplus · Accepted Answer

To find the best choice, we need to calculate the present value of each machine. 
PV of Machine 1 = $6000 + ($500 x 15) - $800/(1+0.07)^15 = $7364.06
PV of Machine 2 = $23,457/(1+0.07)^15 = $9,696.14
PV of Machine 3 = $25,500/(1+0.07)^15 = $10,536.20
Since Machine 1 has the lowest present value, it is the best choice. Among the other two machines, Machine 3 has the lower present value, making it the second-best choice, while Machine 2 has the highest present value, making it the worst choice. Therefore, the rank of preference is 1, 3, 2.

A Company Is Considering Buying a Certain Machine