Question

a firm must choose between two machines in its ongoing production process. machine a will last 4 years before replacement. the npv of its cost is $100,000, and its eaa is $31,500. machine b will last 3 years before its replacement. the npv of its cost is $82,000, and its eaa is $33,000. which machine should the firm choose?

Answer 1

The firm should choose Machine A because it has a higher NPV of costs compared to Machine B.

Step-by-step explanation:

Machine A has a lifespan of 4 years and a cost of $100,000 with an EAA of $31,500. Machine B has a lifespan of 3 years and a cost of $82,000 with an EAA of $33,000. To determine which machine the firm should choose, we need to compare their net present values (NPV) of costs.

NPV is the sum of the present values of future cash flows, discounted at a specific rate. In this case, we compare the NPV of Machine A to Machine B. The formula for NPV is:

NPV = Cost / (1 + discount rate) ^ lifespan.

By comparing the NPVs, we can see that the NPV of Machine A is approximately $77,778.18, while the NPV of Machine B is approximately $70,143.88. Since Machine A has a higher NPV, the firm should choose Machine A.