The cost of using an existing asset: Small Appliances, Inc., is considering star

Question

The cost of using an existing asset: Small Appliances, Inc., is considering starting a new line of business with the excess capacity it currently has on its rivet machine. The current machine is expected to last four years at the current rate of production. However, if a new line of business is taken on, then the machine will have to be replaced in three years instead of four. A new machine that will last four years would cost $50,000. What is the cost of taking on the new line of business? Round to the nearest dollar and assume a 9 percent cost of capital

Explanation / Answer

Since an old machine has to be replaced with the new machine within three years so the extra year is the additional cost which will be = 50000*9% = $4500

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